On 30 September 2024, the government of the United Arab Emirates (“UAE”) issued Federal Decree Law No. 26 of 2024 (On Revoking Certain Federal Laws) which cancels Federal Law No. 17 of 2004 On Combating Commercial Concealment (so-called “Anti-Fronting Law”) effective 01 October 2024. This briefing provides an overview on these legislative changes.
1. What is the reason for repealing the Anti-Fronting Law?
The Anti-Fronting Law was issued in November 2004 with the aim of combatting commercial concealment.
In practice, although the Anti-Fronting Law was widely regarded as being in force, the enforcement of the law was deferred, and the actual implementation seemed to be subject to repeated postponement. To the best of our knowledge, the Anti-Fronting-Law has never been actively enforced. Additionally, no official guidelines have been issued as to when and how the Anti-Fronting Law was to be applied in practice.
2. What were the key aspects of the Anti-Fronting Law?
The Anti-Fronting Law prohibited foreign nationals from carrying out economic activities restricted to UAE nationals. The law prohibited to enable a foreigner, whether a natural person or legal person, to practice any commercial or professional activity that the applicable laws and decisions in the UAE do not allow him to practice whether for his own account or in partnership with other parties or to enable a foreigner to avoid meeting his obligations. The law imposed severe financial and non-financial penalties for violations, including fines not exceeding AED 100,000 per fronting activity, imprisonment for up to two years and deportation of the foreigner.
3. What foreign ownership restrictions did the UAE law historically provide for?
Traditionally, the UAE Commercial Companies Law provided for general foreign ownership restrictions, requiring that at least 51 % of the capital of a limited liability company incorporated in the UAE mainland be owned by one or more UAE nationals. Hence, foreign investors could only own up to 49 % in a limited liability company established in UAE mainland.
In contrast, these restrictions did not apply to companies established in free zones. Instead, one of the traditional incentives for setting up a company in a UAE free zone was the possibility for foreign investors to own 100 % of the shares in a free zone company.
Due to the foreign ownership restrictions historically provided for in the UAE Commercial Companies Law, in the past, so-called nominee agreements or side agreements became rather common practice in the UAE’s business community. They were attempts to mitigate restrictions on foreign ownership and drafted with the aim to produce contractual documentation between the foreign investor and the UAE national shareholder to grant the foreign investor more of the economic interest and control in a main land company than provided for in the Commercial Companies Law (51 % vs. 49 %). As part of such contractual arrangements, the UAE national was typically granted the right to receive a certain (annual) fee. However, regardless of the conclusion of such agreements, the constitutional documents of the mainland company still showed the UAE national as an actual shareholder holding 51 % of the company shares. Depending on the structure selected in an individual case, setting up nominee agreements constituted a potential breach of the Anti-Fronting Law and despite the widespread use, the legality and enforceability of such nominee agreements was questionable. It was unclear whether nominee agreements would be upheld by UAE courts.
4. What is the current framework for foreign direct investment in UAE mainland?
These local ownership requirements were partially relaxed by the adoption of the Foreign Direct Investment Law in 2018 which was later repealed by way of amendments to the UAE’s Commercial Companies Law.
In 2021, the UAE government issued the new (and current) Commercial Companies Law No. 32 of 2021 under which a UAE company may now generally be fully owned by a non-UAE national, unless specific rules require the restriction of 100 % foreign ownership in a specific sector. Following the introduction of these relaxations, nominee agreements are not as widely used as before, as in many cases foreign investors now own 100 % of the shares in a mainland company.
5. Conclusion and Outlook
The repeal of the Anti-Fronting Law is an important clarification and aligns with the UAE government’s strategic decision to gradually relax foreign ownership restrictions to further boost the attractiveness of the UAE for foreign business. Whilst limited foreign ownership restrictions still apply in some strategic sectors, in the past years, many foreigners have already taken advantage of the possibility to wholly own companies incorporated in the UAE mainland. The repeal of the Anti Fronting Law will, however, likely further increase confidence amongst foreign investors who intend to set up a business in the UAE, particularly in UAE mainland.
Dr. Constantin Frank-Fahle, LL.M.
Founding Partner
DE
EN