According to the provisions of U.A.E Corporate law, foreigners are required to partner with local Emirati for establishing business in U.A.E. (other than the free zones, where expats are 100% owner of the business), as sole ownership is only allowed to the local nationals for L.L.C incorporation. Share of local Emirati has to be a minimum of 51%, but on the other hand most of the locals avoid to participate actively in the business. Besides mentioning this 51% share in the memorandum of association, one of the clause includes the percentage of distribution of profit & loss. This bare minimum percentage is 80 / 20 for expat and local Emirati respectively.
In most of the cases, it has been observed that the foreigner makes an agreement with the local Emirati that no such distribution of profits / assets to take place at the end. The term used for such contracts is “Side Contracts or Side Agreements”. Such agreement are made with a notion to avoid any confrontational shareholder dispute in future. U.A.E government has been trying to do away with this common practice of so called “Sleeping Partners” since 2004 with the passing of the “Anti-Sponsorship Law”, also called “Anti-Fronting Law”. According to the newly adopted Commercial Companies Law (Federal Law No. 2 of 2015) Article 29 – Clause 3 reads:
“If it is agreed in a company’s Memorandum of Association that one of the partners is to be deprived of the profits or exempted from loss, or to receive a fixed percentage of profits, such Memorandum shall be deemed void.”
Failure to comply with provisions of the UAE Anti Fronting Law attracts penalty and also bears a criminal overtone for repeated offences. Importantly, the sanctions imposed under Law apply to all persons who are parties to such side contracts or nominee arrangements.
For further details, please contact:
Shahab E. Raja, Advocate
056 779 8643