On 24 April 2023, the Cabinet of the United Arab Emirates (“UAE”) issued Resolution No. 41 of 2023, expanding the jurisdiction of the financial free zone Abu Dhabi Global Market (“ADGM”) to include Al Reem Island in Abu Dhabi which was previously governed by UAE federal and Abu Dhabi local laws. Following this expansion, businesses operating on Al Reem Island that currently hold a license from the Abu Dhabi Department of Economic Development (“ADDED”) are now required to obtain a license from ADGM and comply with its regulatory framework by 31 December 2024 to continue operations on Al Reem Island. Transitioning to ADGM could be done by either applying for a new registration or by choosing to continue an existing registration by way of migration to ADGM. Alternatively, businesses may continue to be registered with ADDED. In this case, it is mandatory for the ADDED licensee to relocate outside the ADGM Free Zone latest 31 December 2024.
1. What should existing businesses consider prior to transitioning to an ADGM license?
The expansion of the jurisdiction and territory of the ADGM to Al Reem Island does not have any effect on existing businesses based on Al Maryah Island.
However, existing businesses based on Al Reem Island that were previously governed by UAE Federal and Abu Dhabi local laws must act until 31 December 2024.
Two options are available:
- Businesses may either continue to be registered with ADDED. In this case, the ADDED entity must obtain a physical office in Abu Dhabi mainland as the business may no longer keep the Al Reem Island office premises and must relocate outside ADGM (that now includes Al Reem Island) at the latest 31 December 2024. Existing ADDED licenses will not be valid for operating on Al Reem Island after 31 December 2024. Businesses that remain on Al Reem Island without an ADGM commercial license after 31 December 2024 may be exposed to fines.
- Alternatively, existing businesses may apply for a new registration with ADGM or file a continuation application with the ADGM Registration Authority to obtain a commercial license from ADGM on or before 31 December 2024.
Businesses should consider several licensing factors when deciding whether to transition to an ADGM license or whether to migrate their business to Abu Dhabi mainland. The licensing requirements and considerations vary for each business based on their operational locations, the nature of their business activities and whether those business activities are subject to any additional third-party approvals.
Businesses engaging with government entities in Abu Dhabi should assess how transitioning to an ADGM license could impact their ability to contract with these entities, as such entities typically require an ADDED license. These businesses should also check whether an incorporation in mainland Abu Dhabi regularly forms part of specific project or tender documents.
Businesses should further consider whether their existing legal structure poses any challenges for transitioning to ADGM and maintaining operational continuity. ADGM is collaborating with ADDED to support businesses during this transition by allowing certain ADDED entities to migrate to ADGM and maintain their existing registration. However, migration is not possible for branches, meaning they will need to register a new branch in ADGM to remain on Al Reem Island.
2. What restrictions apply to businesses in ADGM?
Businesses wishing to remain on Al Reem Island must ensure that the activities they are currently licensed for under their ADDED license are included in ADGM’s list of approved activities. ADGM has published a list of licensed activities in this regard on its website that includes detailed information on each permitted activity (updated in October 2024). This is particularly relevant for oil and gas businesses working with the Abu Dhabi National Oil Company (“ADNOC”), as they must have a specific business activity in cluded on their license for which it is necessary to obtain additional approval from the Supreme Council for Financial and Economic Affairs (“SCFEA”) to conduct business with ADNOC.
All businesses should also consider the general limitations that apply to ADGM-licensed entities, which are mainly restricted to operations within the geographic boundaries of ADGM.
Licensed entities under ADGM, therefore, cannot sell directly to end customers in the Abu Dhabi mainland and must partner with a distributor or agent licensed under ADDED.
While professional services can generally be exported to Abu Dhabi mainland customers under an ADGM li cense, any services requiring a physical presence in Abu Dhabi mainland require an ADDED license. Businesses in the oil and gas sector that require passes from the Critical Infrastructure and Coastal Protection Authority (“CICPA”) for their staff to access and work in critical infrastructure areas in the Abu Dhabi mainland will likely need to keep their existing ADDED license.
Businesses with operations outside ADGM may potentially be able to benefit from the dual licensing regime agreed between ADDED and ADGM. This regime enables ADGM companies to set up branches in Abu Dhabi mainland without the need to lease physical office space in Abu Dhabi mainland.
3. How will transitioning to an ADGM license impact In-Country Value (“ICV”)?
Businesses participating in the ICV program should consider how transitioning to an ADGM license may affect their ICV certificate, which is linked to their current ADDED license. While some ADDED entities may maintain their existing registration through migration, it remains unclear how this will impact their license and the ICV certificate linked to it.
Branches that are unable to migrate to ADGM will likely lose their ICV certificate if they choose to cancel their current ADDED license. It is advisable for businesses to wait for further updates on how these changes may affect their ICV status.
4. What employment considerations should businesses keep in mind if they are transitioning to ADGM?
Businesses should also be aware that transitioning to ADGM would impact existing employment contracts and employee visas under the ADDED entity. The employment contracts currently governed by the Ministry of Human Resources and Emiratisation (“MOHRE”) would need to be amended to comply with ADGM’s employment regulations as ADGM regulates employment affairs through its own employment law. This legal framework would also need to be considered when drafting employment handbooks and internal policies. According to ADGM’s website, once businesses have transitioned to ADGM through the continuation process, all existing employee visas registered under an existing ADDED licensed entity will remain valid until their respective expiry dates without any additional costs. Upon expiry, these visas will be subject to renewal under the ADGM Registration Authority. ADGM’s employee visa quota differs from the employee visa quotas of MOHRE. A transition to ADGM may, therefore, influence the future number of employee visas permitted for an existing lease.
For branches, the existing employment contracts would need to be terminated since migration to ADGM is not possible and any end-of-service benefits (“EOSB”) would need to be paid accordingly.
5. Conclusion and Outlook
As businesses consider transitioning to an ADGM license or relocating from Al Reem Island to Abu Dhabi mainland, they must carefully evaluate the potential effects of both options based on their future operational needs.
Those opting to relocate to the main land should assess the financial impact of potential penalties for early termination of their lease agreement on Al Reem Island and the costs associated with the move, including capital expenditure to be incurred during the fit-out of offices.
On the other hand, entities choosing to transition to an ADGM license and to cancel their existing ADDED license should consider how this change may affect their ICV certificate, their contractual relationships with government entities and their ability to continue their existing business activities. These businesses should also consider that annual ADGM costs are likely to be higher than those for legal entities based in mainland Abu Dhabi.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
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