The government released a new anti-fronting law for the UAE in late 2004. It is intended that this law will come into force in 2007 and, should it do so, it is likely to change how business is done in the UAE.
Under the existing rules, foreigners can set up 100% foreign-owned establishments (sole proprietorships) and service companies but they are limited in the activities they can perform.
This framework has led to a practice whereby UAE nationals set up enterprises or service companies for activities prohibited to foreigners and then lease the trade license to foreigners. This role of fronting also extends to companies in the UAE, which must have 51% UAE national ownership. Normally the UAE national acts as the company sponsor but will rarely invest or get involved in the companies sponsored.
The new law appears to target the practice of leasing trade licences to foreigners for activities they could not otherwise perform.
Proposed penalties for violating the law include heavy fines and possible imprisonment.
It is not yet clear whether companies will fall within the law's remit; if they do, this could mean that UAE nationals will be required to actually invest 51% of the share capital - reflecting their real ownership.
The far-reaching implications of the law for nationals and expatriates alike have led to calls that the law is premature and will adversely affect the local economy. It is possible that the law could be significantly amended, if not repealed, before its implementation date.
Mahyra Roy (mahyraroy@kpmg.com), Dubai
