DIFC’s role as platform to invest in Middle East

The Dubai International Financial Centre (DIFC) was until very recently an absolutely unique jurisdiction, not only in the United Arab Emirates (UAE), but more widely in the Gulf states. With a focus upon financial services, it has played a significant part in the establishment of Dubai as a centre for inward investment into the region’s financial services industry; it serves as a gateway for regional capital and foreign investment into the Middle East and further afield.

Located at the crossroads of several major markets, Dubai is ideally placed to operate as a strategic hub for foreign investors to take advantage of opportunities in the Middle East and North Africa. It is increasingly playing the same role as a hub for investment, financial and technical services channelled to sub-Saharan Africa.

The DIFC, established in 2002, is one of many free zones in Dubai, but it differs from the others in that its remit, to create a world class financial centre, has required a sophisticated legal and regulatory environment, quite detached from the traditional Middle Eastern systems that surround it, to ensure that it fulfils its mission statement and meets the needs of the international business community.

Uniquely in the UAE (until the recent establishment of a comparable financial free zone called Abu Dhabi Global Market), the DIFC operates a common law legal framework. Its creation required an amendment to the UAE constitution and a synthesis of federal and Dubai law. The DIFC has, among other laws, unique contract, companies and insolvency laws, all based upon a wealth of jurisprudence from leading jurisdictions. Importantly, the DIFC is exempt from all federal civil and commercial laws within the UAE, although UAE criminal law still applies.

This framework gives comfort to investors operating in the region who may not be familiar with local laws. Additionally, the sophisticated regulations and procedures that the DIFC provides promote an “ease of business” culture where transactions can be implemented that would prove difficult in the onshore environment.

The DIFC has therefore created its own specific legal and regulatory framework for all civil and commercial matters. This evolution has seen it centrally placed and has helped to enhance and develop the transactional space in a number of ways.

In conjunction with the common law, incorporation in the DIFC means investors benefit from some other important features. These include: (1) 100% foreign ownership (local laws generally require 51% local national ownership); (2) zero percent tax on income and profits for a period of 50 years from the inception of the DIFC; (3) freedom to repatriate capital and profits without restrictions; (4) an entirely independent regulatory agency (which regulates the DIFC market, DIFC securities and DIFC companies, and even issues its own DIFC banking licence); and (5) dispute resolution by a DIFC court made up of a panel including common law superior court judges from outside the region.

The DIFC Companies Law allows a number of different legal forms, including general and limited partnerships, and special purpose companies (SPCs). The most common form of legal entity is the company limited by shares, established under a common law framework. This legal form benefits from the flexibility offered by that body of law that is not replicated in the onshore civil law environment of most countries in the Middle East. These enable a company to be established with tailored articles of association, different share classes and flexible board and shareholder governance provisions.

SPC. While the majority of incorporations in the DIFC have been holding companies and proprietary investment companies, in recent times increased use of the DIFC SPC is proving increasingly popular for structured finance and private equity transactions. While benefiting from the features previously noted, the SPC regulations provide for a number of important dispensations from the requirements of incorporation of standard DIFC companies.

These include no requirement to lease office space – a significant cost associated with incorporation in the DIFC – and no requirement to produce audited accounts or hold an AGM, which the DIFC Companies Law otherwise requires. The SPC requires that a corporate services provider, who supplies the majority of the board of directors, acts as the company secretary and provides the administrative function and a registered office address.

SPCs are seeing that increased use in large project financings as a suitable vehicle is required where a combination of equity and debt is needed. The flexible set-up and attractive features make it an excellent alternative to established SPV domiciles. Recently, SPCs have also been used in a wider range of corporate transactions, including corporate transactions that have a financing element, thus enabling the criterion for a “financing transaction”.

In addition, the benefits of securitization of shares, an English law-inspired insolvency regime and user-friendly court procedures combine to form an environment conducive to international standard financing transactions.

Gateway. DIFC’s innovative offering has seen a marked increase in deal flow to the region and beyond. In particular, it has:

• Increased the methods of financing available to financial markets over and above the traditional methods provided by local banks;
• Encouraged investment from investors who might otherwise not wish to make significant commitments in the onshore environment, thus increasing liquidity; and
• Promoted the opportunities offered by Islamic finance and played a major part in the development of the region’s local financial markets, particularly by attracting a major talent base in banking, accounting, insurance and legal matters.

Establishment in the DIFC also provides the benefits of the UAE’s extensive tax treaty network, ensuring investments are taxed in the country of residence rather than the country of source. The UAE has signed tax treaties with more than 50 countries, including China.

The DIFC offers investors the combination of a developed and sophisticated legal environment set in the midst of a fast growing and developing region, free of taxes. It is now the transactional hub of choice for large and sophisticated corporate and financing deals in the Middle East, and is acting as a catalyst for the economic and financial development of the wider region.

Richard Catling is a senior associate at Al Tamimi & Company