Investing Abroad Through A UAE Company: What Needs To Be Checked First?

If a UAE-based business is looking to invest overseas, there are several factors that should be taken into consideration to ensure this can be done correctly.

 

A UAE entity may wish to invest in a foreign business by purchasing shares, setting up a subsidiary, joint venture, commercial property or intellectual property. As the UAE is a business hub in the region with global banking and investment relationships, it can be a natural home for a business wishing to invest overseas.

 

However, whilst a business may wish to trade internationally, there may be various corporate, regulatory and tax elements to consider. An investment may seem simple to complete from Dubai or Abu Dhabi, however, you may need to consider corporate approvals, regulatory and tax requirements. The investment may also be dependent on what your UAE company is licensed to do, its constitutional documents, shareholders and the nature of the investment.

 

You should always consider if the investment is legally allowed, approved and commercially viable.

 

UAE Entity Approval

 

The first thing to consider is the legal status of your entity. Depending on your entity being incorporated in a UAE mainland jurisdiction, free zone entity or operating in a financial free zone, there may be different requirements.

 

Your entity’s trade licence will not always tell you everything you need to know. You should consider the Memorandum and Articles of Association, shareholder arrangements and any relevant regulatory requirements to check whether the investment is permissible. If your entity was set up for a very specific trading purpose, you may need to ensure that it has the capacity to act as a holding or investment vehicle.

 

Depending on your governance documents, you may need board approval, shareholder approval or other approvals. If your manager/director is signing documents abroad, you should ensure they have the correct approvals and that the documents will be accepted at the destination country.

 

It is best to consider these requirements before you reach an advanced stage in negotiations. If you are buying from a foreign seller, bank or joint venture partner you may need to provide them with certified constitutional documents, current licence, proof of ownership and correctly executed resolution. This can cause delays and extra costs as you may need to have documents attested, legalised, translated and notarised.

 

Direct vs Holding Structure

 

Consider whether you want to invest directly or whether your UAE entity should utilise a holding company in another jurisdiction. If the investment is a simple one, and the country allows foreign ownership, then investing directly may be a good option. This will ensure you can comply with registration, tax and other requirements in the target country.

 

However, if you expect to purchase multiple businesses, bring in other investors, reduce exposure to the operation and simply want to hold valuable assets, using a holding company may provide some benefits. This can also assist with dividend, shareholder loans and ownership. Whilst there may be many benefits this will depend on what you are doing commercially and what the laws say.

 

If you are creating a new entity in another country you will need to consider the extra administration. Costs will incur to incorporate, file annually, have local directors, accounting and banking requirements and tax compliance. Consider how decisions will be made, where the management will be based and whether the holding company actually has a business purpose.

 

If you are creating the holding company purely for tax reasons, you may not get the benefit you are expecting. Tax authorities may look into who really owns the investment, where the effective management is taking place, what the holding company is doing and whether it can benefit from any treaties. If the company is just a shell with no real decision making processes, you may have issues with how the dividends, interest or capital gains are taxed.

 

Ensure that you are using the correct structure to help with the real purpose of the investment.

 

Foreign Ownership & Restrictions

 

Before committing any capital to an investment overseas, a UAE entity should consider what the laws are in the target country. Foreign ownership can vary greatly between different countries. Some countries will allow 100% foreign ownership in most sectors. Others may have restrictions, a requirement to have a local partner or have certain activities only for local investors.

 

There may be restrictions in place for some strategic industries, financial services, telecoms, natural resources, defence related, agricultural, media or property. You may need to have a licence for a specific industry, approval from an investment body or comply with national security requirements. If you are buying an existing business, you may also need to consider merger control or competition law requirements.

 

Consider what you are trying to do. Even if the investment is permissible you may need approval to allow the foreign shareholder to vote, appoint directors or transfer funds. Some jurisdictions will have different rules for passive investments.

 

If the investment is property related, you should consider whether you can own land, commercial property or development assets. This will depend on where it is, your nationality/corporate status, what you intend to do with it and what the title is. If it is a lease, concession or development rights you may not have the same protection.

 

Speak to your local counsel to understand what restrictions are in place and how long it will take to get approval. If you need regulatory approval, you should consider what will happen if there are delays, rejection or conditional approval in your acquisition documents.

 

Banking, Source of Funds & Transfers

 

Even if the investment is legally permissible, you may experience delays if you have not considered your banking requirements. UAE banks and the recipient foreign institution may require you to provide evidence of what the transaction is for, source of funds, ownership of the entity and ultimate beneficial owners.

 

This could include audited accounts, bank statements, tax records, resolutions, sale and purchase agreement, details of the target business and why you are doing the deal. If the funds are coming from a sale of assets, shareholder contribution, loan or dividend you should be able to show what the transaction is.

 

Financial institutions will have controls in place to ensure they understand their customers and the transaction they are undertaking based on the risk standards. You may need to consider sanctions, politically exposed persons and enhanced due diligence. Just because you are transferring between two accounts in your name will not mean that you won’t have any issues. The company should not assume that the transfer will be okay.

 

Ensure that you have enough time in your agreement to pay for the investment. This should allow time for the banks to carry out their checks, foreign exchange and any regulatory approvals. You should ensure that the banks are happy with how you are paying. If you need to go through intermediaries or multiple currencies this should be considered.

 

If you are using shareholder loans or capital contributions, ensure that you have clear documentation. Ensure that you have clearly defined what is equity, debt, payments for services and distributions. If you are transferring funds informally and stating it is a loan you could have issues with the accounting, tax or regulation if it does not fit.

 

Tax Considerations

 

Before finalising your investment structure you should consider the tax implications. A UAE entity may need to consider how foreign income is treated in the UAE. You may also need to consider tax in the country you are investing in. This will depend on what type of income you are getting, what status you have, what legislation applies and any relevant agreement.

 

The UAE has rules in place around foreign sourced income and participation exemptions. You cannot assume that any dividend or capital gains received from overseas will be exempt. You should consider what type of ownership you have, what holding period applies, what is subject to tax (if applicable) and any other qualifying factors.

 

In the target country you may have withholding tax on dividends, interest, royalties and service fees. Your foreign subsidiary may also be subject to corporate income tax, indirect tax, payroll and local reporting. If there is a tax treaty in place you should consider whether the relevant entity can benefit from it and if you need to provide any residence certificates, declaration or other documentation.

 

If you are investing in a related company, ensure that any management fees, financing, royalties or other payments are reflective of what is being provided. You may need to ensure that any related party transactions comply with transfer pricing rules and have documentation to show how they have been decided.

 

The UAE has rules in place around topping up tax for large multinational enterprise groups. If your group falls within the scope you should consider this. You should also consider the tax rules in the other countries your group operates within.

 

You should ensure that the structure you have in place will be tax efficient in all relevant jurisdictions. You should also consider how much it will cost to get professional advice and ensure that you are compliant. This should be balanced against what you expect to get from your investment.

 

Beneficial Ownership & Reporting

 

When investing overseas you should ensure there is transparency around ownership and control of the entities. Your UAE entity may need to have accurate beneficial ownership information. This will depend on the legal status and what register you are registered with. Any foreign subsidiaries or holding companies may have different registers, thresholds and timelines.

 

You may need to provide information on ultimate beneficial ownership. This could be anyone who ultimately owns or controls the business either directly or indirectly. This can become more complicated if there are trusts, nominees or multiple layers of ownership across several countries.

 

There may be reporting requirements that need to be met. If there are changes to shareholders, directors, registered office or beneficial ownership you may need to notify. Some jurisdictions will require annual returns, financial statements, tax declarations and foreign investment disclosure. If you fail to meet these requirements you may incur penalties, restrictions to your filings or issues when selling your investment.

 

Ensure that you have clear documentation showing the ownership chain, who has the authority to make decisions and supporting documentation. This will help with any regulatory bodies, banks, auditors, tax advisors and potential buyers carrying out due diligence.

 

Management, Liability & Exit

 

Ensure that your legal structure reflects how you will manage your investment. If you are taking a minority interest or entering a joint venture ensure that your shareholder agreement has provisions in place for board representation, reserved matters, information access, funding, dividend policy, restrictions and dispute resolution. Without clear contractual protections you may have little influence over decisions affecting the value of your investment.

 

Consider what liabilities exist with the target business. Are there any outstanding tax claims, employment issues, litigation, regulatory breaches, IP rights or contractual restrictions? If you are purchasing an asset you will likely have less exposure to the company’s obligations, however if you are purchasing shares you will generally be exposed to the company’s obligations depending on the law and contractual protections.

 

Consider what will happen if you want to exit. There may be foreign ownership restrictions, pre-emption rights, regulatory approvals, capital gains tax and exchange control requirements. Your shareholder agreement should have practical dispute resolution in place. If appropriate there should be provisions in place to handle a sale, buyout or transfer to a third party.

 

Consider if you want to resolve any disputes locally or through arbitration. What law will apply and can any judgment/award be enforced in the location of the assets? Whilst you may have a clause that looks comprehensive, if it does not consider the jurisdictions you may find it has little practical use.

 

Overall Risk

 

The main risk you may face when investing overseas is not that it is prohibited, but that there are multiple factors to consider. You may forget to consider corporate approvals, the bank may ask for further evidence, there may be foreign ownership restrictions or tax assumptions may not be correct.

 

If you are a UAE business you should have a structured approach and speak to your corporate lawyer, tax advisor, banking contacts and local counsel in the target market. This should ensure that your structure is permissible, you have regulatory approval, the funds can be transferred, tax implications, reporting requirements and exit options.

 

Ensure that you are not over complicating things. If you are only taking a small minority interest you may not want to over complicate. However, even a small investment may face ownership restrictions, banking issues and unexpected tax costs.

 

Whilst the UAE can be a great place to expand internationally, the laws in the markets your companies are investing in will still apply. Having a clean structure with clear responsibilities for each entity and factoring in the costs to comply will give you the best transaction.

 

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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