Delays for fronting up

Michael Grose, partner, Clyde & Co, on why the posteponement of the new 'Fronting Law' is a good thing.

COMMENT, Business

This week there is good news for foreign businesses.

One of the last legislative acts of the late President of the UAE, HH Sheikh Zayed bin Sultan Al Nahyan, was to pass Federal Law No.17 of 2004, combating business fronting (the "Fronting Law"). Recognising the potentially seismic consequences of this law on business practices in the UAE, the law provided that it would take effect three years from the date of its publication in November 2004.

The business community, naturally, has carried on since then in much the same way as before. With the moratorium expiring on 15 November, however, concern about of the effects of the law began to resurface earlier this year.

On a high level, the Fronting Law prohibits all fronting, defined as: "Enabling a foreigner, whether an individual or corporate person, to carry on any economic or professional activity prohibited for him by the laws and resolutions in force in the United Arab Emirates."

Although precisely what amounts to fronting will depend on how the law is applied, there are many activities that are commonplace within the construction sector that may be outlawed such as:

  • ' Sole proprietorships or trading establishments which are owned or controlled by foreign nationals under the umbrella of a trade licence held by a UAE national
  • 'Arrangements between shareholders of limited liability companies which create the appearance of transferring ownership of more than 50% of the shares to non-nationals
  • 'Purchasers of property by UAE nationals on behalf of foreigners outside the areas designated for foreign ownership
  • ' Arrangements between a local engineering practice and a contractor or foreign consultant whereby the local consultant agrees to act as 'engineer of record' so as to obtain a building permit

• Unincorporated joint ventures that do not comply with the requirements of Article 56 of Federal Law No. 8 of 1984 (the Commercial Companies Law)

The fine levied for fronting may not exceed AED100,000 but, for anyone tempted to view such a fine as an acceptable business risk, a repeat offence carries with it a further fine and incarceration in one of the UAE's offenders' institutions (ie prison) for up to two years. In addition, an offender's registration for the fronted activity shall be cancelled for a period of between two and five years.

It is worth mentioning that, irrespective of the Fronting Law, arrangements of any type that are designed to facilitate the performance of activities for which a business is not specifically licensed, carry with them a number of inherent risks. Nevertheless, by elevating the risks to a new level the Fronting Law's consequences are potentially far reaching.

Unease over the effect of the Fronting Law has been widespread since its publication. It is little surprise, therefore, that the implementation of the Fronting Law was quietly shelved at the end of September. Cabinet decision 229/12/2007, which at the time of writing is still awaiting official publication, instructs the Ministry of Economy to:

  • ' Present a detailed study setting out a mechanism and methodology for phasing in the law
  • ' Make recommendations for sectors to which the Fronting Law should be applied initially and the priorities for its application
  • ' Consider the sectors within which foreign investors should be allowed to own in excess of 50% of the shares of a limited liability company
  • ' Prepare an awareness campaign, including a guidance note on the law's application

Interestingly, the cabinet decision acknowledges, by implication, the need to reach a long awaited conclusion on amendments to the UAE's companies laws and on the introduction of a foreign direct investment law. The combination of economic growth, liberalisation and proliferation of free zones, has made an overhaul of the UAE's economic policy towards foreign direct investment a matter of urgency. In the absence of such reform, the Fronting Law risks being a backward step.

If the December 2009 postponement is an indication of the timetable for the much anticipated regulatory changes many foreign companies looking to invest in the region will be disappointed. However, it is possible that the Ministry of Economy recognises the scale of the task ahead and is working on significant changes to the legal and economic environment, of which the introduction of VAT is one part, in preparation for taking the economy to another level. Whether or not this is a correct reading of the cabinet decision, the Fronting Law's postponement is welcome news.

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