In a landmark decision issued on July 14, 2025, the Dubai Court of Cassation has established a significant legal precedent regarding fictional partnerships in limited liability companies (LLCs). This ruling addresses a common practice in the UAE business landscape and provides important clarification on how courts should handle cases where partnerships are found to be fictional, especially in light of recent legislative changes.
Background: The Evolution of UAE Company Law
The UAE’s corporate legal framework underwent substantial transformation with the issuance of Federal Decree-Law No. 32 of 2021 concerning Commercial Companies. This law introduced several progressive changes, most notably allowing single-person limited liability companies—a structure previously unavailable under the older Federal Law No. 8 of 1984.
Prior to this legislative update, UAE law required LLCs to have at least two shareholders, with a national partner holding at least 51% of the company’s capital. This requirement led to the proliferation of “fictional partnerships,” where local sponsors would be listed as majority shareholders on paper but without genuine involvement in the business or actual ownership.
The Court’s New Approach to Fictional Partnerships
The Dubai Court of Cassation’s General Assembly has now established that courts should not automatically invalidate limited liability companies established before Federal Decree-Law No. 32 of 2021 on the grounds of fictional partnership, even if these companies lack the genuine participation of UAE national partners holding the required 51% ownership.
This represents a significant shift from previous jurisprudence, which would typically declare such arrangements null and void for violating public policy requirements.
Key Legal Principles Established
- Non-retroactive Invalidation: The Court held that contracts establishing LLCs before the new law came into effect should not be invalidated solely because they involved fictional partnerships, provided no final judgment declaring their nullity had already been issued.
- Legal Transformation: When a court finds that a partnership is fictional, the ruling should transform the company’s legal structure to reflect reality—either into a proper LLC with the actual partners identified, or into a single-person LLC, depending on the factual circumstances.
- Continuation of Economic Activity: The Court emphasized that this approach serves to maintain economic stability and protect ongoing business activities rather than disrupting them through retroactive invalidation.
- Regularization Period: The judgment references the one-year grace period provided by Article 359 of the new law, during which existing companies must align their status with the new legal requirements.
Legal Reasoning and Public Policy Considerations
The Court justified its position by explaining that legal amendments often aim to rectify previously non-compliant situations. The decision reflects a pragmatic approach that prioritizes economic continuity and acknowledges the reality of business practices in the UAE.
The ruling emphasizes that legislating for such situations does not merely validate previously illegal arrangements but represents legal flexibility and adaptation to changing economic realities. It acknowledges that legal frameworks must evolve to address practical business needs while maintaining regulatory oversight.
Implications for Businesses
This precedent has significant implications for businesses operating in the UAE:
- Existing LLCs with Fictional Partnerships: These companies can continue to operate without fear of nullification based solely on the fictional nature of their partnership structure, provided they comply with requirements to regularize their status under the new law.
- Judicial Remedies: When courts determine a partnership is fictional, they now have a clear framework to transform the company’s legal structure rather than invalidating it entirely.
- Transition to Single-Person LLCs: The ruling facilitates the transition of companies with fictional partnerships to single-person LLCs, a structure now explicitly permitted under UAE law.
- Legal Certainty: The decision provides greater legal certainty for foreign investors who previously relied on nominee arrangements to meet local ownership requirements.
Conclusion
This landmark ruling by the Dubai Court of Cassation demonstrates the UAE judiciary’s pragmatic approach to business law interpretation. It balances strict legal compliance with economic realities and the need for business continuity. The decision aligns with the UAE’s broader economic vision of creating a flexible, business-friendly environment while gradually reforming legacy legal structures.
The ruling further cements Dubai’s reputation as a jurisdiction that can adapt its legal framework to support economic development while maintaining regulatory standards—a delicate balance that has contributed significantly to the emirate’s success as a regional business hub.
For businesses operating in the UAE with structures established before the new company law, this ruling provides welcome clarity and a pathway to regularize operations without disruption to their commercial activities.
Having said that, contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.
*Disclaimer: our blogs, law updates, and FAQ’s are freely distributed for educational purposes and to showcase recent updates and regulations in the UAE’s framework.
If you have any questions and need assistance, contact us at our number or book an appointment online
