3. Legal Persons and Arrangements in the UAE
The UAE has a complex regime for formation of legal persons and arrangements, with 39 corporate registrars across the Emirates, the Commercial Free Zones (CFZs), and the Financial Free Zones (FFZs). Historically, each registrar has its own processes, but following the passage of AML-CFT Decision, which institutes common basic standards for all registrars, these processes are being harmonized across the UAE.
Certain information on legal persons doing business in the UAE is publicly available through the National Economic Register. For entities with a UAE business license, the National Economic Register contains the entity’s license number, address, business activities, and the name of a manager. LFIs are encouraged to consult the Register when conducting CDD on legal persons, but should not rely on information contained in the Register without independently verifying it with the customer.
3.1. Identification of Beneficial Owners
Under AML-CFT Decision, all registrars of legal persons in the UAE must comply with the following requirements:
• Registrars must provide the public with information on the types and features of companies they establish, the process for creating those companies, and the process by which members of the public can obtain information on those companies, including on the beneficial owner(s). • Registrars must obtain and maintain certain basic information on each company they register, including its name, address, a list of directors, its legal form, and its founding statutes. • Registrars must identify the beneficial owners of each company they register, defined as any individual owning or controlling at least 25 percent of the company.
In addition, all legal persons in the UAE are required to:
• Maintain accurate and up to date information on their shareholders and beneficial owners; • Identify nominee shareholders and directors to their Registrar; and • Appoint an individual resident in the UAE to be responsible for providing this information to the Registrar.
Cabinet Decision No. (58) of 2020 Regulating the Beneficial Owner Procedures further defined these requirements. All legal persons in the UAE must be licensed or registered, must identify their beneficial owners, and must hold accurate, up-to-date information on their beneficial owners in a Register of Beneficial Owners. They must also report the same information to the relevant registrar. The Resolution also requires that nominee directors identify themselves to the legal person for which they serve as director, and this information must also be included in the legal person’s Register.
There are certain limited exemptions to this requirement. For example, legal persons that are publicly traded on a stock exchange, or that are owned by such a company, do not have to identify or report their beneficial owners because of other transparency-related measures and obligations associated. In addition, if no individual meets the threshold by owning at least 25% of a legal person, that entity can report an individual who controls the entity (such as its managing director) instead of a true beneficial owner.
Together, these requirements aim to ensure that customers that are legal persons established and registered under the laws of the UAE must identify their beneficial owners and must always have up-to-date information on these individuals available. LFIs cannot rely solely on customers’ statements and must verify the identity of beneficial owners independently. But a UAE-based legal person customer that claims to be unfamiliar with the requirements, or represents that it has never been required to identify its beneficial owners, may not be in compliance with the law and should be treated as at least high risk.
3.2. Legal Arrangements Under UAE Law
Two types of legal arrangements can be formed under UAE law:
• Trusts can be formed in the Mainland as well as in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). In a trust arrangement, the owner of certain funds, known as the settlor, places these funds under the control of a trustee for the interest of a beneficiary or for a specified purpose. These assets constitute funds that are independent of the trustee's own estate, and the rights to the trust assets remain in the name of the settlor or in the name of another person on behalf of the settlor. • Awqaf (singular waqf), also known as endowments, can be created on the Mainland. Awqaf are a form of legal arrangement created according to shari’a law. A waqf allows a property owner to endow certain assets (often real property, but also shares or other income-producing assets) for the benefit of family members or a charitable cause. The endower loses control and ownership of the assets, which are registered as endowed and managed by a supervisor or trustee. Many awqaf are directly managed by the General Authority for Islamic Affairs and Endowments, but others are privately superintended.
Under AML-CFT Decision, Articles 9 and 37, trustees of legal arrangements, or persons holding analogous positions in other legal arrangements, are required to hold accurate and up-to-date information on the beneficial owners of the trust or other legal arrangement. For legal arrangements, the beneficial owners are defined as the settlor, the trustee, and the beneficiaries or identifiable class of beneficiaries, along with any other individual exercising ultimate effective control over the legal arrangement. Under Article 9 of AML-CFT Decision, LFIs must identify these individuals as the beneficial owners of their legal arrangement customers.
In both cases, it is important for financial institutions to be aware that these legal arrangements allow for an individual to legally hold and control funds that he or she does not own and does not have the right to benefit from. A trustee of a trust or waqf may open an account for trust funds under his or her own name, so that the account appears to belong to an individual rather than a legal arrangement. Although trustees are required to disclose their status, LFIs, as part of Customer Due Diligence (CDD), should take a proactive approach to identifying whether a customer is a trustee. This may include directly asking customers whether they are acting as trustees.
3.3. Economic Substance Requirements
Under Cabinet Resolutions (31) of 2019, (7) of 2020, and (57) of 2020, UAE legal persons operating in certain sectors with relevant income must meet requirements related to the level of core business activities that they carry out in the UAE (the Economic Substance Test). All firms conducting any of the following activities must pass the annual Economic Substance Test:
• Banking; • Insurance; • Investment Funds Management; • Lease-Finance; • Headquarters operations; • Shipping; • Holding Company activities; • Intellectual Property; • Distribution and service centres.
In order to pass the test, these firms are required to make an annual report, the Economic Substance Report, to their registrar showing that they in fact carry out core income-generating activities within the UAE, that these activities are directed and managed from the UAE, that the firms maintain an appropriate number of employees, and that the firms have appropriate physical premises. The report is then reviewed by the Federal Tax Authority, which makes a determination as to whether the criteria for economic substance have been satisfied. The Economic Substance Report is not currently available to financial institutions directly, but LFIs may request an attested copy of the Report from their customer or prospective customer.
The Economic Substance Test could help reduce the likelihood that UAE companies in these sectors are shell companies. The Economic Substance Test is retroactive, however, with companies required to submit Reports at the end of the twelve-month period in which the qualifying activity took place. In addition, Reports may not be promptly reviewed. LFIs should not rely on a customer’s assertion that it has passed the Economic Substance Test and must conduct appropriate customer due diligence, as discussed in section 4.3 below. This may include requesting the customer’s Economic Substance Report from the customer itself.