Until recently, the Kingdom of Bahrain was the only choice for domiciling a collective investment vehicle within the Middle East and North Africa ("MENA"). Since 2005, however, the Dubai International Financial Centre ("DIFC") has provided an attractive alternative. The DIFC is a free zone established within Dubai, in the United Arab Emirates ("UAE"), with its own laws, regulations, court systems and, critically for those looking to establish a fund here, its own regulatory authority, the Dubai Financial Services Authority ("DFSA").
This article describes opportunities available for investment in the Middle East through the DIFC.
Benefits Of A DIFC Investment
Recent revisions to the DIFC funds regime, in addition to other developments under the DIFC Companies Law, have placed the DIFC front and centre within the Middle East as a credible domicile, both for those seeking to raise investor commitments and deploy capital in the region, and for those pursuing investment objectives outside of the region, but requiring a Middle East domicile.
Clear advantages to establishing a fund within the DIFC exist, and include the following:
- The DFSA regulations governing DIFC funds are based on best practice from more established fund jurisdictions, thereby bringing a level of familiarity and comfort to investors.
- DIFC funds are classified as GCC (Gulf Cooperation Council)1 vehicles. This enables them both to take advantage of certain advantageous tax treatment between the six members of the GCC, and to mitigate local ownership and asset-specific investment restrictions that exist in the region with respect to "non-GCC" investment.
- On the basis of current law and practice, any investment fund established within the DIFC (and indeed, any company incorporated within the DIFC) will be exempt from any DIFC income, capital gains and corporation tax for a guaranteed period of 50 years from the date of enactment of DIFC Law No. 9 of 2004. This zero rate of tax also extends to transfers of assets, profits or salaries in any currency to any party outside the DIFC for the same period of time.
- In most circumstances, DIFC entities benefit from the UAE's extensive, and continually expanding, double taxation treaty and agreement network.2
THE EXEMPT FUNDS REGIME
The end of 2010 saw wholesale regulatory reforms to the DIFC funds regime. In particular, a new "Exempt Funds Regime" was introduced.
The Exempt Funds Regime is principally targeted at sponsors wishing to attract investment into a DIFC fund vehicle (an "Exempt Fund") from no more than 100 investors (although the fund may be marketed to more than 100 potential investors), each of whom must qualify as a "Professional Client" (broadly, an investor who can certify to prescribed criteria as to wealth and investment expertise), and who is able to subscribe for an initial subscription amount of not less than USD 50,000 (or currency equivalent).
Exempt Funds benefit from a lighter regulatory regime than other DFSA-regulated funds. By way of example:
- Notification requirements are relaxed — the DFSA need only be notified two weeks prior to an Exempt Fund's launch (as distinguished from certain funds not qualifying as Exempt Funds, which require DFSA approval prior to launch);
- There are no prescribed requirements for the content of the information memorandum provided to potential investors (save for prescribed regulatory disclosures and core requirements under the "Specialist Fund" regime, as described below), with the only requirement being that the information memorandum must, at a minimum, contain all information that an investor would "reasonably require"; and
- An "External Fund Manager" (broadly, an entity authorised to establish and operate an investment fund in a jurisdiction other than the DIFC) is able to sponsor and establish a DIFC-domiciled fund without being separately licensed by the DFSA.
An Exempt Fund may be established as a company, a limited partnership or an investment trust. Sponsors may also constitute an umbrella fund as a protected (or segregated) cell company under applicable DIFC laws. An Exempt Fund may be open or closed ended (with the exception of a fund classified as a real estate fund under the Specialist Fund criteria, which must be closed ended), denominated in any currency and may have either individual or corporate directors.
The Exempt Funds Regime – Specialist Funds
In addition to the basic provisions regulating Exempt Funds, the DIFC funds regime has prescribed additional regulations for those categories of fund deemed as Specialist, such as "real estate", "hedge", "private equity", "feeder", "fund of funds" and Islamic. An Exempt Fund may be classified within more than one definition of Specialist Fund, such as an Islamic private equity fund, or a fund of funds hedge fund.
Simply, a fund classified as Islamic is one that invests and conducts its operations in accordance with the principles of Islamic Shari'a. A private equity fund is so-called where the main objectives of the fund would be to invest in unlisted companies or to participate in management buy-outs or buy-ins. A fund is classified as a hedge fund where it has a broad mandate and flexibility in the investment strategy pursued, aims to achieve absolute returns rather than returns relative to market, and employs certain investment techniques such as short selling, use of derivatives and leverage.
Likewise, a real estate fund and a real estate investment trust are both fund vehicles that invest directly and/or indirectly via special purpose vehicles into real estate assets.
While the additional provisions related to these classes of funds impose further regulations on Exempt Funds falling within a Specialist category, they also remove or exempt such funds from provisions that do not apply to that Specialist class (by way of example, private equity funds are not subject to the requirement for a separate custodian to be appointed) and that are otherwise imposed on other categories of Exempt Fund. It is to be welcomed that the provisions impose only those requirements that make sense in relation to a given asset class or strategy. Further, the DFSA has demonstrated on various occasions that it is willing to waive, on a case-by-case basis, provisions in relation to Specialist Funds that are otherwise applicable to Exempt Funds.
External Fund Manager
A key development under the new Exempt Funds Regime is the ability of an External Fund Manager to establish an investment fund in the DIFC without having to obtain a separate licence from the DFSA.
External Fund Managers must:
- be domiciled in a "Recognized Jurisdiction"3 and regulated by the appropriate regulator in that Recognized Jurisdiction (with an applicable licence that includes the establishment, operation and management of investment funds or applicable permission encompassing the same);
- submit to the jurisdiction of the DIFC Courts; and
- appoint a DIFC-based administrator in relation to any DIFC funds that they operate.
Otherwise, the provisions regulating External Fund Managers and "Domestic Fund Managers" (broadly, an entity established in the DIFC and authorised by the DFSA to establish and operate an investment fund) are substantially the same.
For entities not appropriately authorized in a Recognized Jurisdiction, or not domiciled in a Recognized Jurisdiction, fund sponsors may wish to consider engaging a Domestic Fund Manager for the purpose of compliance with DFSA regulations, with appropriate sub-advisory and investment management agreements in place (which is permissible under the DFSA regulations).
Although off to a slow start, interest in DIFC-domiciled Exempt Funds has gathered pace. DIFC-domiciled Exempt Funds represent a real option for asset managers and fund management organizations seeking to raise commitments or deploy capital in the MENA region. While Cayman, BVI, Luxembourg and Ireland remain popular, the DIFC should be added to the list of possible jurisdictions of choice.
1. The Gulf Cooperation Council comprises the Kingdom of Bahrain, the State of Kuwait, the Sultanate of Oman, the State of Qatar, the Kingdom of Saudi Arabia and the United Arab Emirates.
2. As at March 2012, the UAE had entered into 63 double taxation treaties or agreements. Source – UAE Ministry of Economy and Finance.
3. The current list of Recognized Jurisdictions includes most EU Member States, the Channel Islands, Singapore, India, Switzerland, Malaysia, Hong Kong, the United States, Australia, Canada and South Africa. The DFSA has discretion to allow fund managers from other jurisdictions. See www.dfsa.ae for the full list.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.