UAE: An attractive investment destination for India?
India and the United Arab Emirates' (UAE) enduring economic partnership is one of the oldest and most successful involving a member of the Gulf Cooperation Council (GCC). The geographic proximity of the UAE to India has played a significant role in fostering investment ties. However, in recent decades, due to the strengthening of political alliance between the UAE and India, the partnership between the two countries has reached new heights.
According to a recent report by fDi Markets1, India ranked amongst the top five countries for confirmed Foreign Direct Investment (FDI) into Dubai. As per the GlobalData FDI Projects database, there has been a sharp increase in investments from Indian investors into the UAE following the Covid-19 pandemic. By way of illustration, there were a total of 22 projects from India to the UAE in 2019. and this figure jumped to 79 projects in 2021 representing an increase of 365%2. The surge suggests an increasing willingness on the part of Indian businesses to expand their presence in the UAE and also points to the consolidation of the UAE's position as a prime destination for FDI from India businesses and individuals.
In 2022, the top sectors which received significant investment from Indian investors were consumer products (28%), software and IT services (20%), communications (19%), pharmaceuticals (8%) and business services (8%).
The UAE and India have recently entered into a Comprehensive Economic Partnership Agreement (CEPA) to boost bilateral trade between the two countries. This agreement was signed on 18 February 2022 and came into effect on 1 March 2022. This deal enables businesses and traders from both countries to benefit from preferential tariff rates in relation to the import of various goods. The Ministry of Finance in the UAE predicts that UAE exports to India under CEPA will increase to US$7.6 billion whilst imports will increase to USD$14.8 billion by the year 20303.
The figures already show that between April 2022 to November 2022 there was a 30% increase in bilateral trade and India's exports increased approximately by 19% to 20%4. This demonstrates that the implementation of CEPA has been a smooth process and both nations are already leveraging the tremendous potential offered under the agreement.
What makes the UAE an attractive investment destination?
The UAE serves as a natural gateway for Indian businesses to access the Middle East and North Africa (MENA) region and other global markets. Not only does the UAE represent a major access point for foreign investment, but the stable government, increasingly sophisticated and reliable legal infrastructure, attractive capital markets regime and the open and flexible commercial environment for foreign investors have also helped to promote the UAE as an attractive investor destination or staging post. Foreign investors wishing to conduct business activities in the UAE have the option of setting up their business either in mainland (onshore) or in one of the designated free zones that have been established in the UAE.
One of the principal differences between mainland and free zone companies is that a free zone entity cannot conduct its operation outside of its jurisdiction without the support of a local agent, whereas a mainland company can freely engage in its business activities anywhere in the UAE. This means a mainland business would be more suitable where the goods are being traded onshore, as opposed to a free zone business which would have restrictions on trading outside of the designated zone. There are certain tax considerations too, dependent on the free zone.
Whilst previously there were widespread restrictions on foreign ownership onshore in the UAE, these have recently been relaxed. In particular, through amendments to the Commercial Companies Law which came into effect on 2 January 2022, the government has allowed investors and entrepreneurs to establish 100% foreign-owned companies onshore in almost all sectors (though there are a few 'strategic' sectors where Emirati ownership is required).
This reform also allows branches of foreign companies to operate without needing to appoint an Emirati agent. These recent legislative changes demonstrate significant progress in liberalizing the extent to which foreign investors can invest in onshore businesses in the UAE.
The UAE also offers investors more than 40 multidisciplinary free zones. Free zones are an attractive option for foreign businesses looking to relocate or expand their global footprint as they offer 100% foreign ownership of the enterprise, 100% import and export tax exemptions and 100% repatriation of capital and profits. There may also be benefits with respect to value added tax and the newly introduced corporate tax, depending on the free zone.
All these benefits promote international trade and encourage foreign investment.
Free zones are special economic areas, typically operating to a greater or lesser degree under their own rules and regulations. These free zones typically offer world-class infrastructure facilities and a robust regulatory and licensing framework for investors. Broadly speaking, free zones can be categorised into two types: financial free zones and economic free zones. Financial free zones such as the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market are financial free zones which are well suited to private equity firms, financial institutions, corporate and professional service providers and banks. These two free zones operate under a common law framework, with their own common law courts where the rules and regulations are largely modelled on the laws of England and Wales.
Economic free zones, on the other hand, are largely thematic in nature and are established to cater to businesses in various sectors or industries. For instance, Jebel Ali Free Zone (with its port and large industrial area) may be suitable for a company which exports goods outside the UAE. Similarly, Dubai Internet City (administered by Dubai Development Authority) may be appropriate for an IT services firm.
Several of these free zones have also adopted a dual-licensing regime, thereby allowing companies domiciled there to apply for and obtain a mainland/onshore licence. The objective here is to permit these businesses to trade in goods and services outside the designated zone.
Dubai is an increasingly attractive destination for incorporating a business, not least because of the diversity and flexibility created by its large number of free zones.
In recent years, Dubai has strengthened its position as a tech hub, including in the fintech space. For instance, the DIFC offers tech entrepreneurs and start-ups the option to apply for a relatively robust and low-cost "innovative licence" to enable early-stage businesses to grow and scale up. This DIFC innovative hub scheme also offers mentorship, guidance, and access to investors, making it an attractive ecosystem for innovation in the fintech sector. This may be particularly attractive to lean Indian tech firms who are looking for a launch pad to roll out their products and services into the Middle East and the wider MENA region. Separately, the UAE is one of the very first jurisdictions to establish a licensing framework for crypto currencies and digital assets. Whilst the regulatory landscape is rather complex and requires a detailed assessment of rules and regulations, it nonetheless offers fintech and crypto businesses a sophisticated licensing regime in which to deploy their services.
In addition to the above, the UAE is one of the safest countries in the world with a very low crime rate, making it one of the most desirable tourist destinations and places to live and work in the world. The UAE is highly cosmopolitan and offers significant diversity, being home to over 200 different nationalities. Further, the UAE offers some of the highest returns on real estate investments across the world with an average of 7%, which is higher than in many global financial centres such as London, Singapore and New York. These additional factors goes on to show why the UAE is very attractive for international investors and is becoming one of the go-to destinations for them.
The UAE is successfully positioning itself as a business-friendly location for investors from India and across the globe, with projections indicating continued growth in the coming years.
The optimal structuring option for a particular business will depend on a range of factors, and our regional specialists are well placed to assist in determining the most appropriate and efficient corporate structure for your business in the UAE. Please get in touch with our India Desk or UAE Corporate team for further information.