major legal developments
We are following major legal developments with respect to corporate structures in the UAE.
In what is being described as ‘game-changing, the UAE will bring into effect substantial amendments to Federal Law No. 2 of 2015 concerning the Commercial Companies Law (“CCL”) with respect to foreign investment into the UAE.
Currently, local (or onshore) companies have certain requirements in terms of their ownership structures.
Onshore entities are incorporated pursuant to the CCL.
Most foreign investors choose to establish as a limited liability company (“LLC”).
Significantly, in relation to entities incorporated under the CCL, at least 51% of the capital of a company must be owned by a UAE national or a company that is wholly owned by UAE nationals, or alternatively, 100% of the capital of the company should be owned by Gulf Cooperation Council (“GCC”) nationals.
This has often led to the LLC’s constitutional documents being amended in order to allocate higher profits of the company to the foreign 49% shareholder.
These ‘side agreements’, which alter the beneficial ownership and profits owed to a foreign shareholder, have always been up for debate as to their enforceability.
Moreover, Federal Law No. 17 of 2004, concerning anti-fronting (the “Anti-Fronting Law”) is designed to prevent a foreigner from undertaking any economic or professional activity which such foreigner would not be able to carry out under UAE law, whether undertaken on the foreigner’s own account or in a venture with others and enabling such foreigner to evade applicable law.
As such, it is open for argument that the Anti-Fronting Law is intended to prevent the use of ‘side agreements’ with UAE nationals.
Ultimately, this was a grey area between strict legal technicality and the tolerated commercial practical reality of doing business in the UAE, and, in particular, the enforceability of side agreements.
However, the anticipated amendments to the CCL will remove the requirement for a 51% UAE national ownership of an onshore company and thereby completely overhaul the current onshore company structure. The amendments to the CCL will allow wholly foreign-owned onshore companies for the first time in the UAE’s history. It is important to note that the amendments will come into force six months after the amendments to the CCL are published in the Official Gazette. The current CCL regulations will remain unchanged until that date.
These amendments are part of a slew of legal changes over the past few months.
In November, the UAE introduced an overhaul of personal and family law which liberalized laws in relation to cohabitation and raising penalties for sexual harassment as well as a significant amendment allowing couples residing in the UAE to apply foreign law to their divorce proceedings.
In October, Dubai updated its work visa regulations to permit people to live in Dubai, but work remotely for companies overseas. Previously, people were required to work for a company with a physical presence in Dubai in order to obtain a work visa.
In September, the UAE and Israel signed the Abraham Accords. The Abraham Accords is the first Middle East peace treaty since 1994 and makes the UAE one of only four, out of 22, Arab countries to have normalized relations with Israel.
All of these changes taken together paint a picture that the UAE is making significant strides to innovate its legal and business framework with the mindset of attracting foreign investors. As with any change to the law, it is important to take legal advice as to how these changes apply to your existing or anticipated business interests in the UAE.