UAE Investments in East Africa: Legal & Commercial Considerations

Business and investment relationships between the UAE and Eastern Africa (Uganda, Kenya, Tanzania, Rwanda, Burundi, Southern Sudan, Ethiopia, Democratic Republic of Congo and Djibouti) are experiencing upward growth. According to the UAE’s Federal Competitiveness and Statistics Centre, the UAE’s non-oil exports and re-exports to the Common Market for Eastern and Southern Africa (COMESA) reached $4 billion and $6.4 billion respectively in the first nine months of 2021. COMESA comprises 19 African Member States that synergized with the aim of promoting regional trade and integration. Collectively, those states have an estimated population of 586 million people, GDP of $805 billion, and a global export/import trade in goods worth US$ 324 billion. Majority of the Eastern Africa states are COMESA members.

Despite the COVID-19 pandemic, East African economies remained resilient and on trajectory as the fastest growing region in Africa, according to the African Development Bank. With such traction, it is inevitable that UAE companies are beginning to consider Eastern Africa as an attractive business and investment destination for both expansion and potential new business set-up by way of Eastern Africa subsidiaries. In order to de-risk such opportunities, it is imperative that the following legal and regulatory considerations underpin business decisions for entities exploring commercial relations in the Eastern Africa regional hub:

Entity incorporation/registration

Incorporation of local entities and registration of foreign ones is conducted with the responsible government agency depending on jurisdiction. In all the Eastern Africa countries highlighted in the introduction, it is possible to have both natural and corporate persons as shareholders in the entity being incorporated. For registration, certified and translated copies of corporate documents will be required by the companies’ registries.

Licensing

Key sectors such as oil and gas, financial services, telecommunications, education, healthcare, transport, space and aviation require licensing and regulatory approval before business commencement. Part of the due diligence process scrutinizes the financial and technical capacity of the proposed investor. Documentation such as certified copies of licenses and recommendation letters issued by the UAE government would be considered and given significant weight as evidence of expertise and good standing. Application and licensing fees and timelines differ depending on sector and jurisdiction.

Tax

Different tax regimes apply to corporate tax, income tax, VAT, withholding tax and other tax bases. Market entrants must seek proper tax advice on technical aspects such as transfer pricing, tax incentives, refunds policies and domiciliation prior to making commercial decisions. It is imperative that the scope of advice sought should also extend to any affiliated offshore structures as local/domestic tax laws on double taxation, change of control and residency may differ and/or are subject to periodic amendments by way of annual tax Bills. In cases of mergers and acquisitions, tax due diligence on the target entity must be comprehensive and proper representations and warranties executed to cover any likely liability.

Labor and employment

The labor market for both skilled and casual workers is undergoing rapid changes. Generally, there is a friendly environment for expatriate workers. From a national content perspective, especially for regulated industries, it is advisable to have in place s policies and plans to progressively enhance local participation in key management positions. In some instances, there could be approvals required before employment of expatriates. In such cases, the investor must demonstrate to the regulator that search for locals with the appropriate skills has not yielded positive results. However, this requirement applies to very few and specialist sectors and jobs where the local skills base is either very narrow or totally lacking. Country specific advice should be sought in respect of the employment and statutory benefits applicable.

Priority sectors

Most of the East African countries have highlighted key sectors such as agriculture, manufacturing, tourism, ICT and mining as priority sectors. This means that such sectors are being touted as the engines of economic growth and development. Usually, the priority criteria is listed in the investment codes of the respective countries together with periodic investment guides issued by the government agencies overseeing local and foreign direct investment in the respective countries. Nearly all the Eastern Africa governments have also gazetted industrial parks and free trade zones offering land, investment benefits and incentives to catalyze interest in the priority sectors.

Knowledge and technology transfer

Knowledge and technology transfer processes follow the conventional established practices such as commercial agreements, intellectual property transfers and assignments. Opportunities for collaboration and partnerships, research and development, and innovation support exist in academia and in-house corporate innovations are growing in number and value. From the emerging company perspective, there are co-working spaces, incubation and accelerator programs where exhibitions, demo day and hackathon programs are convened in major East African cities.

Banking and financial arrangements

Major international banks have either presence or correspondence banking services with local banks in the region. The standard KYC, AML and CFT due diligences apply. Conventional banking instruments and securities are recognized widely and some countries have enacted Islamic banking frameworks. Most countries have liberalized foreign exchange policies. A few countries have some foreign exchange controls and restrictions, especially on repatriations and withdrawals but waivers and exemptions may be negotiated especially on key project finance and public private partnership arrangements.

Land, water, power and other utilities

The availability of land as a key factor of production remains one of the most important investment considerations. This is further impacted by the multiple and complex land tenure systems in the region. Customary and traditional forms of land ownership exist alongside the documented/formal systems. Both official and physical due diligence processes must be undertaken to safeguard security of tenure. Water resources exist as the region lies in the rich Nile, Congo and Victoria basins. Recent developments in ESG and climate change have increased sustainability scrutiny over environmental, energy and waste management. Industrial tariffs for power and water may be major negotiation points with utility services providers. Opportunities for both on and off-grid energy mix for hydropower, solar and wind solutions have largely yielded positive results. Supporting legislation for public private partnerships (PPPs) exist across the region.\

Transport and Logistics

The region is well served by several ports, trade routes and increasingly digitized and automated border points and customs. Electronic customs documents submission and processing is acceptable at most of the formal border points for movement of cargo. Emirates Airlines, Etihad Airways, Qatar Airways and Flydubai all offer aviation options at the major international airports within Eastern Africa and beyond. There are significant improvements in road and internal movement within the hinterland thus servicing ley distribution channels and networks for fast moving consumer goods. Warehousing and storage facilities for rent/lease may be negotiated and customized to specific needs. Identifying the right pricing models, sales and marketing strategies is a key consideration in benchmarking profitability as local nuance/perspective may be different from global or established market practice in other regions. Dubai Ports World (DP World) and Abu Dhabi Ports (AD Ports) are among the major players with key concessions and investments in the region.

Political climate and security

Major political risk is attached to election cycles, with the associated post-election volatility. The major hotspots continue to be Somalia, some pockets of eastern DRC and South Sudan. However, there have been some smooth political transitions, particularly in Kenya. All the East African countries have Bilateral Investment Treaties with the UAE with commitments on investment protection. Diplomatic and consular relations and channels also exist. It is anticipated that positive business and macroeconomic environments facilitated by more investment and cross-border trade will help to lower the overall level of risk and conflict in these economies. Prospective investors must seek proper advice on anti-corruption policies and frameworks to mitigate ABC risk. From a dispute resolution perspective, commercial and investor-state arbitration frameworks exist. There is a growing trend in use of the DIFC Courts and other external options with English law capability.

Youth, gender and social development

In 2020, the UAE launched the $500-million Consortium For Africa focused on youth and digitalization. The purpose of the Consortium is to align the UAE government and its private sector’s commitment to Africa by combining resources to support it into one focused entity to assist development, investment, and contribute to an optimistic new future vision for Africa. Prospective investors may explore some of the corporate social responsibility and philanthropic avenues presented by such a platform.

Conclusion

The UAE accounted for 88 percent of investment from the GCC to sub-Sahara Africa by investing a total of $1.2 billion between January 2016 and July 2021 according to The Economist Intelligence Unit report commissioned by the Dubai Chamber. Entities that may not necessarily want to incorporate local entities or register as foreign companies will still have vehicles such as joint venture agreements, franchising, outsourcing, collaboration partnerships and strategic alliances at their disposal to tap into the new business frontiers. However, proper risk management and mitigation measures must be established to de-risk the opportunities and avoid potential legal and regulatory pitfalls.

Silver Kayondo is a Ugandan lawyer currently on secondment at the Dubai office of global law firm White & Case. He focuses on Foreign Direct Investment (FDI), corporate and sovereign advisory mandates across East Africa.