Structuring the investment
Property assets will often be acquired by a special purpose vehicle to ring-fence liability and protect the asset from the risks associated with the operation of the business. The choice of investment structure may also be guided by considerations such as:
- optimum legal ownership;
- the ability to co-invest with funders;
- the ability to include joint venture partners;
- the ability to benefit from foreign insolvency or trust regimes;
- mitigation of tax or transfer fees;
- compliance with the principles of shariah law; and
- avoidance of inheritance issues.
The chosen structure should be formulated in light of the restrictions on foreign ownership and the requirement to register property rights. In Dubai, for example, local laws provide that any attempt to circumvent the foreign ownership restrictions will be null and void. Any interested party, including the Dubai Land Department and Dubai's Public Prosecutor, can request the setting aside of an avoidance structure.i Asset or share acquisition
If the seller is a company, the purchaser may have the option of acquiring the asset (an asset deal) or shares in the owner of the asset (a share deal). In each case, any restrictions on ownership (for the asset or shares) should be identified. The ultimate structure by which the purchaser wishes to hold the asset should be identified to achieve the most efficient transfer method. This is particularly important in cases where a transfer (including a share transfer) will attract property transfer fees.ii Abu Dhabi and Dubai companies
Abu Dhabi and Dubai companies encompass those incorporated in Abu Dhabi and Dubai (onshore and outside the free zones) and include limited liability companies and private joint stock companies. Where such a company has foreign nationals or entities as shareholders it will be considered a foreign national and subject to the same restrictions on ownership of property rights.iii Free zone companies
An Abu Dhabi free zone company can hold rights over property within that free zone and Abu Dhabi's investment zones. A recent change in practice has also permitted free zone companies incorporated in the ADGM to acquire property within Dubai's freehold areas.
A Dubai free zone company can hold rights over property within that free zone and Dubai's freehold areas. Additional restrictions may apply in cases where the Dubai free zone company has foreign nationals or entities as shareholders. For example, only recently have free zone companies incorporated in the DIFC been permitted to acquire property within Dubai's freehold areas (outside the DIFC) without requiring the approval of the Dubai Land Department.iv Free zone companies – offshore
A Dubai free zone company (offshore) can hold rights over property incorporated within that free zone and Dubai's freehold areas. Additional restrictions may apply in cases where the Dubai free zone company (offshore) has foreign nationals or entities as shareholders. In such cases, only those types of Dubai free zone company (offshore) permitted by the Dubai Land Department will be able to hold rights over property. For example, the Dubai Land Department currently permits offshore companies incorporated in the Jebel Ali Free Zone to register property rights over property located in Dubai's freehold areas.v Foreign entities
Foreign entities encompass those incorporated outside the UAE, whether onshore in a jurisdiction such as England or offshore in a jurisdiction such as the British Virgin Islands.
A foreign entity can hold any of the recognised property rights over property located in Abu Dhabi's investment zones.
A foreign entity can no longer register property rights over property located in Dubai's freehold areas. The foreign entity will need to establish (as its subsidiary) a locally incorporated entity permitted by the Dubai Land Department to hold title – for example, a free zone company (offshore) incorporated in the Jebel Ali Free Zone.vi Unregistered leases
Historically, where a foreign national or entity wished to acquire premises for a long term in a location where it was not permitted to acquire a property right, it would enter into a long lease. The suitability of such arrangements has become increasingly uncertain, given the requirement to register all leases and the fact that the foreign national or foreign entity may be precluded from doing so owing to the nationality restrictions. There are also practical consequences of having an unregistered lease (e.g., the local authorities may refuse to issue or renew a company's business licence and utility companies may refuse to connect utilities).vii Trusted owners
Should a foreign national or entity wish to exercise effective control over a property situated in an area where it is not permitted to acquire a property right, it may consider the trusted owner structure. A UAE national or entity will hold legal title to the property on behalf of the beneficial owner. As well as the attendant risks involved in holding beneficial (not full legal) ownership, it is arguable that this method of ownership breaches UAE law and as such may be unenforceable.
There are restrictions on foreign investment in UAE property that vary according to the nationality of the investor and location of the property. The restrictions attach to both natural and legal persons. Because the restrictions are not laid down in federal law, it is necessary to consult the local laws and practices of each emirate.i Foreign ownership in Abu Dhabi
Foreign nationals, and entities owned in whole or in part by them (foreign entities), can own certain property rights in the investment zones of Abu Dhabi. The available property rights include ownership of apartments and floors in buildings (with no right to the underlying land), usufruct and musataha. The investment zones include projects such as Al Raha Beach, Reem Island and Saadiyat Island.
Foreign nationals and entities can hold leases of property located in the investment zones for a contractual term of up to 99 years. They can also hold leases of property located outside the investment zones but will be limited to a contractual term of 25 years.
GCC nationals, and entities incorporated in the UAE or GCC that are wholly owned by GCC nationals or in part with UAE nationals, can own the same property rights as foreign nationals and, in addition, freehold within the investment zones.ii Foreign ownership in Dubai
Foreign nationals and foreign entities can own property rights in the freehold areas of Dubai. The available property rights include freehold, usufruct and musataha. The freehold areas include projects such as the Palm Jumeirah, Jumeirah Lakes Towers, Dubai Marina and Downtown Burj Khalifa.
Notwithstanding the above, the Dubai Land Department has implemented a policy that prevents the direct registration of property rights by foreign entities. Instead, it will permit registration by certain locally incorporated entities that have foreign nationals or foreign entities as shareholders. By establishing one of these entities as its subsidiary, to hold title, a foreign entity will be able to acquire the relevant property.
Foreign nationals and entities can hold leases of property located in the freehold areas for a contractual term of up to 99 years. They can also hold leases of property located outside the freehold areas but will be limited to a contractual term of 10 years.
In Dubai there is no distinction between UAE and GCC nationals. They can own any of the recognised property interests throughout Dubai. However, entities incorporated in the GCC will be subject to the requirement to establish a locally incorporated subsidiary to hold title.
Finally, public joint stock companies incorporated in the UAE, irrespective of any shareholders that are foreign nationals, will be treated as UAE nationals and can, therefore, own any of the recognised property interests in Dubai.