Foreign direct investment in the Gulf Cooperation Council

Foreign direct investment in the Gulf Cooperation Council

Foreign direct investment (hereafter: FDI) is considered to be one of the most low-risk forms of international trade. With this type of activity, the foreign investor takes an active and permanent part in the management of their entity in the host state. Thus, this type of economic activity differs significantly from trade, which does not have the component of permanence, nor is it the same as portfolio (equity) investment, in which there is no active participation in the management of a foreign entity.

Foreign direct investment focuses on creating a close relationship between an entrepreneur and a country of business (host state) that is not their home country. This relationship is intended to generate shared profits – on the one hand for the investor, who profits from the business they have opened to a new market, and on the other hand, the transfer of assets to the host country is a source of income for the administration (in the form of taxes, fees incurred in issuing permits, etc.) and for the local community, which receives access to a new product or service along with new employment opportunities.

In order to facilitate the organization of foreign investment and at the same time safeguard the raison d’etre, the host state can take various legal measures – both at the national and international levels (within the framework of bilateral investment treaties, or BITs).

Steps at the level of domestic, national, or state legislation may include, for example, so-called stabilization clauses – a commitment by the host country, through and under its domestic law, not to change certain regulations. This applies, for example, to the self-restraint of expropriation and nationalization of investments – such a clause is a signal that economic activity in a country is secured and not threatened by sudden withdrawal for public purposes. A similar solution, but more comprehensive, is the adoption of an act with the rank of directly applicable bill on the promotion of foreign investment, which is a kind of protective umbrella designed to encourage investors to locate capital (both sensu stricto and, for example, in the form of know-how, human resources or technological innovation) in the host state. The disadvantage of the above measures from an investor’s perspective is their relative instability – since this is a national law, it can be amended relatively easily, possibly without consultations with international stakeholders.

Sometimes regulations on FDI are placed in framework treaties on trade cooperation, but the common practice is to conclude bilateral agreements dedicated exclusively to the issue of investment – the aforementioned BITs. Such a solution is advantageous for the investor – because the law created at the international level cannot be changed at the discretion of one of the parties, so the protection guaranteed by the agreement is more permanent. In addition, these treaties often agree on the settlement of disputes, including at the international level (investment arbitration), which improves the situation of the investor in a situation where a violation would occur. For the state parties, which are both host and investor states, BITs are an opportunity to boost GDP, drive economic growth and increase attractiveness to more investors from the region.

Investments in the MENA region

The economies of the countries in the region collectively known as MENA (Middle East and North Africa) are currently at very different stages of development. This is due to both their differing geographic locations, historical backgrounds, and the current political situation.

From the point of view of foreign investors, the Arabian Peninsula (excluding war-torn Yemen, and therefore including the Kingdom of Saudi Arabia, the Kingdom of Bahrain, the State of Qatar, the State of Kuwait, the Sultanate of Oman and the United Arab Emirates) is the most interesting area, which is both economically, politically and culturally cohesive. Countries in the region tied up close economic and military cooperation in 1981 under the Gulf Cooperation Council (commonly known as the GCC), and they will be the focus of this paper. Within the Council there is a free trade area designed similarly to the construction of the European Union’s internal market, which also includes a customs union and a common VAT rate. The GCC countries have similar markets, enormous purchasing power, a large share of foreign workers in various sectors of the economy and are taking intense steps to attract foreign investors. Characteristic features of their domestic investment law are the unavailability of strategic sectors to foreigners, the creation of special economic zones where foreign entrepreneurs have more opportunities and rights than in the rest of the countries (especially in terms of business ownership), and restrictions on the acquisition of real estate. International trade treaties are concluded both with the organization as a whole, acting as a representative of member states, and with specific governments. Investment-only treaties are purely bilateral, while framework agreements on the subject, usually in the form of mutual declarations of investment promotion, appear in the GCC’s comprehensive economic cooperation agreements with other countries or regions.

On a different note, another interesting, though emerging Arab investment center, is Egypt.

Attractiveness of the region from the perspective of FDI

GCC countries are taking a number of measures to make the region more attractive in the eyes of potential investors. A particularly exposed advantage of Arab markets is their size and purchasing power – the highest GDP of a GCC member state was about $173 billion in 2020 (Saudi Arabia ), and the lowest – $33.9 billion (Bahrain ). In addition, the region is economically and politically stable (due to its effective isolation from embattled Yemen, which has been considered a failed state for several years), although for the most part the regimes of GCC countries are not democratic. Corruption remains at a stable, average level (with the exception of Kuwait and the UAE, which rank in global rankings slightly above the average GCC state or Arab state in general), but measures are being taken to counter it.

In addition, the GCC is a rapidly growing region on many levels, not only in the area related to the oil industry, but also in the service sectors, including finance and insurance.

National investment law on the example of the UAE

The UAE is the largest center of foreign direct investment in the region. In 2020, despite the pandemics, FDI inflow to the country amounted to $19,884 million, the highest among GCC states. The UAE’s investment domestic law is also available in English, making it the most accessible regulation, which is probably due to the interest of investors from different parts of the world in the country.

The primary domestic legislation governing the relationship between the state and foreign investors in all seven emirates is Decree No. 19 of September 23, 2018, on foreign direct investment. It covers entities that operate in mainland-type areas, i.e. outside designated free trade zones, called free zones, where it is possible to establish a company in one of two forms (Free Zone Limited Liability Company or Free Zone Company and Free Zone Establishment ). Prior to the 2018 decree, opportunities for investors in the mainland were significantly limited – predominantly in terms of the percentage of business ownership and the proportion of employees hired (Emirati citizens versus foreigners). In the wave of making investment law more attractive in the Peninsula, the UAE has also changed its approach, and it seems that at this point the country can be considered the best suited and most welcoming to foreign investors. Indeed, they can own up to 100% of a company, although until June 2021 the maximum shareholding was 49%. In addition, they are protected from expropriation and confiscation of the assets of the entity they operate (Article 9 of the Decree), and disputes are to be resolved in the first place by alternative methods (Article 12). The act provides for the opening of almost all sectors of the economy to FDI, excluding (Article 7(2)) thirteen strategic areas from the perspective of security (e.g., postal services, military industry), the economy (finance and insurance) or public morality (issues related to ḥağ/hajj, or the obligatory Muslim pilgrimage to Mecca). FDI projects can take one of two legal forms: a limited liability company or a private joint stock company.

Investment relations of GCC countries with Europe

The Gulf Cooperation Council, acting on behalf of its members, is a party to international economic treaties, although the Peninsula States are just as likely to enter into bilateral agreements. Among the most important acts of international law concluded between the GCC and other international organizations and states, are the 1988 Cooperation Treaty with the European Union (then the European Community), the Free Trade Agreement with the European Free Trade Association (2008), the Framework Agreement on Trade, Economic, Investment and Technological Cooperation with the United States (2012), and the still-negotiated Free Trade Agreements with the People’s Republic of China and Mercosur.


The Cooperation Treaty between the then European Community and the countries of the Cooperation Council was signed more than thirty years ago. It is an agreement containing provisions for mutual support of investments through their promotion and protection (Article 7). This is the only investment commission included in this act, as it was expected that shortly after the signing of the Cooperation Treaty the parties would agree on the content of a free trade agreement, however, that did not happen. Although negotiations began in 1990, after 24 fruitless rounds, they were suspended in 2008. In 2017, another attempt was made to strengthen European-Arab relations by launching talks on trade and investment. Indications are that this time the talks may yield better results – in essence due to a change of emphasis in the EU’s foreign economic policy, which focuses on emphasizing environmental issues and moving away from fossil fuels, which coincides with the interests of GCC countries. These states are aware that the region’s oil reserves are beginning to dwindle and an energy, and therefore economic, transition will soon be necessary.


The Peninsula’s relations with European countries outside the European Union have resulted in a more modern treaty with a broader scope. The Free Trade Agreement between the European Free Trade Association (Iceland, Liechtenstein, Switzerland, and Norway) and the GCC was concluded in 2008 and entered into force in 2014. The agreement contains a single mention of promoting mutual investment (Article 1.1(f)), but most issues related to this sector are now governed by bilateral agreements. Most of these date back to the turn of the century (for example, Switzerland signed BITs with Kuwait and the UAE in 1998, with Oman in 2004, and with Saudi Arabia in 2006).

Bilateral investment treaties

As mentioned earlier, the Gulf Cooperation Council states prefer to form the details of international economic relations directly with external stakeholders. Despite the high frequency of bilateral economic relations in the area of investment law, none of the countries in question has a model bilateral investment treaty.

The United Arab Emirates have signed the most BITs. The first, with Kuwait, was concluded in 1966, while the most recent is from 2022, with Indonesia as the other party (it has not yet entered into force). Over that time, the Emirates has concluded 110 BITs, although some of them have expired. To put this number in a broader context, it is worth adding that Poland is a party to 38 agreements (in force: 36) of this type, the United States to 45 (in force: 39), and Germany to 120 (in force: 114). In view of this, it seems that the UAE should be considered a country eager to enter into investment agreements and open to both inviting investors to the Peninsula and investing Emirati resources externally. Within the GCC, it is also the state most frequently involved in international investment arbitration disputes, having so far acted as the investor’s home state thirteen times and as the host state six times (respondent state). One dispute has been settled in favor of the UAE (against an investor from Italy, concerning a permit to use the Al-Hamriyya Port in Dubai), two were discontinued and the others are pending.

Kuwait is another GCC state leading the way in terms of the number of treaties it has concluded – it has also signed 92 of them to date, although some of them have expired or were terminated. In total, it has been involved in fourteen investment disputes, seven times each as respondent state and nine times as home state. As of February 2022, one dispute has been resolved in favor of Kuwait, two discontinued and one settled, while the others are pending.

Qatar, Oman and Bahrain rank midway between the UAE and Kuwait and Saudi Arabia. Nonetheless they also are taking active steps to make their markets more attractive by entering into BITs. They are parties to, in turn: Qatar – 62 treaties, Oman – 36, Bahrain – 32. It seems likely that Qatar’s economic relations will be revived again in the coming years. Since 2017, the country was in conflict with most countries in the MENA region due to accusations of financial support for terrorism. The signing of an agreement at the GCC summit in Al-’Ulā in January 2021 and the opening of borders by Saudi Arabia are considered the end of blockade and a sigh of normalization. The economic blockade has severely damaged Qatar’s hitherto very strong economy, and the image crisis has arguably only further discouraged foreign investors from considering FDI projects. On the other hand, World Cup tournament from late 2022 has definitely played its part in popularizing that country and its ravishing economy, which has so far proven to bring many investors, but also highlighted certain downsizes, namely issues with breaches of human rights and immigrant-based worker system often described as modern slavery.

The Kingdom of Saudi Arabia, although the largest economy in the region, has concluded very few bilateral investment treaties – only 25, with 21 in force. This may be due to its rather late opening to external markets – KSA joined the WTO only in 2005 and concluded its first BIT less than 11 years earlier, in 1994. Nonetheless, initiatives to make the Saudi market more attractive are now beginning to be noticed, especially as part of the Vision 2030 long-term development program – for example, work is underway to amend the Commercial Companies Law, which would allow investors to own 100% of a company’s shares. Interestingly, the country has been involved in investment disputes as a host country more often than the other GCC members – as many as 10 times. However, most of these are still unresolved.

The decisive factor in the relatively small share of foreign capital in the Saudi economy is demographic. Saudi Arabia has been pursuing a policy of „Saudization” of the labor and investment market since the 1980s, with increased efforts to reverse demographic trends – specific to the region as a whole – in its markets. This has two goals: on the one hand, to limit foreigners’ access to strategic sectors, and on the other hand, to address unemployment among Saudi citizens, to activate the labor force (especially women) and increase the number of qualified Saudi workers in the market.

Comparison of the 1993 Polish BIT and the 2020 Israeli BIT

Investment treaties entered into by the UAE are mostly of the so-called older generation, i.e., they have provisions to promote the economic development of state parties and broad but general fair and equitable treatment (FET) and investor protection clauses. The most recent treaties, however, are already called 4th generation treaties, due to the expansion and clarification of investor protection issues and the abandonment of general clauses intended to promote economic development. Unlike the most modern treaties of this type, commitments to transparency, care for the environment or corporate social responsibility still do not appear in Emirati BITs. The acts also include arbitration clauses in ad hoc arbitration tribunals, both state-to-state dispute resolution and state-to-investor dispute resolution, despite the growing debate on the subject in the international community .

One example of the change in approach – both regional and global – to the content and construction of bilateral investment treaties are two Emirati treaties. The first, concluded with Poland in 1993, entered into force a year later, and is written in a manner characteristic of first-generation acts. The „Israeli” BIT, on the other hand, is an interesting research matter not only from a legal perspective, but also from a political one, as an unprecedented strengthening of Israel’s economic relations with Arab states hitherto in open conflict with them due to the Palestinian cause. Signed in October 2020, it has not yet entered into force.

Investment and investor protection, FET clause

Poland’s BIT includes a clause on „full protection and security [of investments] in accordance with international law” and „fair and equitable treatment of investments,” the FET (quoted from the published text in the Polish version, Articles 2(1) and (2) ). States parties shall guarantee that the management, maintenance, use, benefit, acquisition or disposal of investments, rights related thereto, and associated activities made in its territory by an investor of the other Contracting State shall in no case be subject to and affected by arbitrary, unjustified, or discriminatory measures (Article 2(3)).

The agreement signed with Israel expands on these three provisions, introducing a catalog of four violations of the fair and equitable treatment clause in Article 2(3):

1. denial of access to justice in criminal, civil or administrative proceedings;
2. fundamental violation of the principle of due process and administrative procedure;
3. obvious arbitrariness;
4. discrimination on clearly unlawful grounds, such as gender, race or religious beliefs.

In addition, the phrase „full protection and security” has been expanded to include protection of the investor’s physical well-being and investment (Article 2(4)), but no more than the standard police protection afforded to citizens of the host country (paragraph 5), and no more than the standard protection afforded to foreigners under international law (paragraph 6).

National treatment and most-favored-nation clause

As with the FET and investment protection clauses discussed above, both BITs include assurances of national treatment for investors and a most-favored-nation clause. The wording of these assurances in the Emirate-Poland agreement is quite general:

Article 3.
National clause and most favored nation clause

(1) Each Contracting State shall accord in its territory to the investments and income of investors of the other Contracting State treatment no less favorable than that accorded to the investments and income of its own investors or to the investments and income of investors of any third country, if the latter is more favorable.

(2) Each Contracting State shall accord within its territory to investors of the other Contracting State, with respect to the management, maintenance, use, benefit, acquisition or disposition of their investments or any other activity incidental thereto, treatment no less favorable than that accorded to its investors or to investors of any third country, if the latter is more favorable.

Meanwhile, the Israeli agreement primarily details the concept of „treatment,” limiting its scope in both cases to management, maintenance, use, enjoyment or disposal of investments (Article 4(1) and (2)). In addition, it was noted that „treatment” refers only to domestic law – thus excluding any obligations under international law.

Dispute resolution

Both the Polish-Emirati agreement and the Emirati-Israeli agreement provide for a single method of resolving investment disputes – an ad hoc arbitral tribunal, composed of three arbitrators: two appointed by the state and the investor (in the case of a host state-investor dispute) or the state-party (in the case of a state-to-state dispute), and a third, the chairman of the panel, chosen by the arbitrators themselves. However, this must be preceded by an attempt to resolve the conflict amicably (or through diplomatic contacts).

In the case of the agreement with Israel, the arbitration may be conducted according to the rules of the Convention of the International Center for Settlement of Investment Disputes, the UNCITRAL rules, or, with the agreement of both parties, according to any other arbitration rules or in any other arbitration institution (Article 17(3)). The agreement with Poland does not explicitly mention any of the above regulations – the arbitration is to be conducted according to rules that both parties simply agree to.

Other provisions

The other provisions are similar – their essence is similar, in fact the same, but the 2020 treaty consists of more finely detailed clauses.

However, it should be noted at this point that none of the above-mentioned agreements – neither „old” nor „modern” – included provisions on issues that are important today from the perspective of ecology, sustainability, or corporate social responsibility. These matters that have been addressed for several years in such agreements, e.g., the CSR clause was included in the Danish model BIT, and the Canadian and U.S. models address the immediate publication of universally applicable law, so their absence in the Israel-UAE treaty seems glaring.


The Persian Gulf is becoming an increasingly attractive destination for foreign direct investment – now not only for purely economic reasons, but also thanks to regulations being tailored to the needs and expectations of investors, both at national and international levels. „Investment in investment” is seen in the region as one way to free the Peninsula’s economy from oil, as well as an opportunity to develop other economic sectors – from non-oil fossil fuels to tourism.

Nevertheless, from a European perspective, investment exchanges with GCC countries are not a priority at this time. Europe appears to be one of the regions of the world lagging behind in establishing trade relations with the Peninsula. There are several reasons for this state of affairs. On the Arab side, the situation is probably due to a concentration of forces on deepening relations with Asian and large Western partners, so investment negotiations – but also more broadly, trade negotiations – are being conducted with the United States, the United Kingdom, China, other Arab countries. In contrast, the European Union, with its emphasis on the social aspects of the initiated trade contacts – human rights, environmental protection, the rule of law – is a difficult partner, as the GCC sees the inclusion of such guarantees as an attempt to violate their sovereignty.

In summary, it should be noted that investment law in the Arabian Peninsula region has been undergoing intense liberalization for several years – changes are taking place both at the domestic level and are evident in the international treaties of recent years. This liberalization is intended to attract foreign projects to drive economies even more strongly. A great deal of emphasis is therefore also being placed on information campaigns on the emerging opportunities for investors on the Peninsula – each of the GCC countries has well-prepared online platforms, usually in several languages, and information on current laws is readily available online. However, since the assessment of the above measures has been shaken by the SARS-Cov-19 pandemic, it is difficult at the time of writing to say with certainty whether the steps being taken are having the desired effect. However, there is no doubt that in the coming years such an evaluation will be possible, and with it the shape of foreign direct investment in the region can be further refined.



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