16 Dec 2013

SETTING UP IN THE DIFC

Authored by: Marisa Finnerty

SETTING UP IN THE DIFC

The Dubai International Financial Centre (DIFC) is a geographically defined free zone established in 2004 in the Emirate of Dubai. The DIFC was the first UAE free zone to be designated as a “financial” free zone and is currently the only fully operational financial free zone in the UAE (although it was announced earlier this year that a second financial free zone will be established in Abu Dhabi). In this article Marisa Finnerty looks at some of the benefits of setting up in the DIFC and the types of entities which may be established.
 
In brief:

  • There are a number of benefits to establishing a business in the DIFC including 100% foreign ownership, 0% tax rate on income and profits for 50 years and the freedom to repatriate capital and profits without foreign exchange or other restrictions.
  • The DIFC legal system is based on English common law and UAE civil and commercial laws and foreign ownership restrictions do not apply within the DIFC.
  • In general, a person that wishes to carry on an activity in the DIFC where such activity is deemed to constitute a “Financial Service” under the DFSA Regulations, must first obtain an appropriate licence from the DFSA to carry on that activity.
  • Non-regulated entities are those which are established in the DIFC but are not engaged in carrying on a Financial Service (as defined in the DFSA Rulebooks) or are not required to be regulated pursuant to one or more of the exemptions set out in the DFSA Rulebooks.

General

Within the DIFC, UAE civil and commercial laws do not apply, nor do UAE foreign ownership restrictions. However, the criminal laws of the United Arab Emirates (including overarching federal laws relating to anti-money laundering and the financing of terrorism) apply in the DIFC.

The DIFC uses English as its main language and has its own legal system based on the principles of common law. The DIFC has created its own independent judicial system with the DIFC Courts being responsible for the independent administration and enforcement of justice in the DIFC.

The principal stock exchange in the DIFC is the NASDAQ Dubai. The DIFC also has its own registries for companies, real estate and security administered by the respective registrars.

Businesses providing financial services (including banking services) in the DIFC are subject to the licensing and supervisory jurisdiction of the Dubai Financial Services Authority (DFSA) which, among its other functions and responsibilities, regulates financial services activities conducted in and from the DIFC through its rulebooks that implement and flesh out certain DIFC Laws. The rulebooks and the style of regulation and supervision bear considerable resemblance to those currently found in jurisdictions such as the UK, Australia and Singapore. Furthermore, there is a trend to model new regulation (for example in relation to the marketing of securities) on EU Directives to the extent possible.

Benefits of setting up in the DIFC

Some of the key benefits of establishing a business in the DIFC include:

  • 100% foreign ownership.
  • 0% tax rate on income and profits for 50 years.
  • Legal system based on English common law.
  • Freedom to repatriate capital and profits without foreign exchange or other restrictions.
  • A dollar denominated environment.
  • A separate legal and regulatory framework with a high standard of rules and regulations.
  • A developed infrastructure to facilitate business operations.

Types of Entities

The main types of entities which may be established in the DIFC include:

  • Company Limited by Shares (LTD) – A LTD is permitted to raise capital by offering shares by way of a public offer and can issue securities. A minimum of one shareholder is required. LTDs are the most commonly used entity type within the DIFC.
  • Limited Liability Company (LLC) – A LLC may not become regulated by the DFSA and may not issue securities. A minimum of one member is required.
  • Recognised Company (RC) – A RC is a registered branch of an existing foreign company within the DIFC. A RC is not considered to be a separate legal entity and therefore is a mere extension of the foreign incorporated company.
  • Limited Liability Partnership (LLP) – A LLP may be established by two or more persons who should be members of the LLP. The liabilities of the members are limited to the extent of their contributions to the LLP.
  • General Partnership (GP) – A GP is formed by two or more persons and all partners are jointly and severally liable without limitation, for the debts and obligations of the partnership.
  • Limited Partnership (LP) – A LP is formed by two or more persons and must include at least one general partner whose liability will be unlimited and one limited partner whose liability shall be limited to the contribution made by it to the LP.

The above is not an exhaustive list of the types of entities which may be formed in the DIFC (examples of other types include Special Purpose Companies and Protected Cell Companies). In addition, a branch of a pre-existing LLP, GP or LP may be registered in the DIFC. The DIFC Authority also permits foreign companies to be transferred to the DIFC (provided that the foreign company is authorised to do so pursuant to the laws of its jurisdiction of incorporation).

Non-Regulated Entities

Non-regulated entities are those which are established in the DIFC but are not engaged in carrying on a Financial Service (as defined in the DFSA Rulebooks) or are not required to be regulated pursuant to one or more of the exemptions set out in the DFSA Rulebooks. Examples of such entities include holding companies, companies carrying out proprietary investments, companies carrying out activities of a support or back-office nature, service providers such as recruitment agencies, restaurants, coffee shops and bars.

The process for setting up a non-regulated entity as a LTD comprises of two main stages:

1.      DIFC Business Development Team
 
An application is submitted to the Business Development Department of the DIFC Authority which should include an application form, a business plan, details of the proposed directors (a minimum of two directors are required to be appointed), copies of the audited accounts of the shareholders for the previous (3) years and financial projections for the DIFC company.

Once completed, the DIFC Business Development Team will submit the application to the DIFC Registration Review Committee (RRC) which, if satisfied that the relevant requirements have been met, will issue an “in principle” approval. The approval of the RRC will be based on certain criteria including: (a) the reputability of the applicant; (b) the financial resources of the applicant; (c) business risk; and (d) contribution to Dubai GDP.
 
2.      DIFC Registrar of Companies
 
Once the applicant has been granted an “in principle” approval by the RRC, the applicant will be granted access to the online application portal referred to as “DIFCSTAT” through which it would complete the application to be submitted to the DIFC Registrar of Companies (ROC) for the purposes of incorporating the DIFC company.

During this phase of the process the applicant will be required to: (a) complete various application forms through DIFCSTAT; (b) enter into a lease agreement with respect to the premises to be leased by the DIFC company; (c) submit a board resolution of the incorporating shareholder approving the establishment of the DIFC company; (d) prepare and execute the articles of association of the DIFC company; (e) execute a personnel sponsorship agreement with respect to the employees to be employed by the DIFC company for the purposes of obtaining the relevant visas and work permits; and (f) provide details of any body corporate which owns in excess of 10% of the shares in the shareholder of the DIFC company and procure that the ultimate beneficial owner(s) execute an acknowledgement in this regard.

The DIFC ROC will review the application and, subject to it approving the same, will incorporate the DIFC company and issue an incorporation certificate and commercial license. Following this, the full amount of the share capital of the DIFC company will be required to be lodged into a bank account opened in the company’s name (the minimum share capital requirement for non-regulated entities is USD 50,000). Following the deposit of the share capital amount, the shares in the DIFC company may be formally allotted to the shareholder.

Regulated Entities

In general, a person that wishes to carry on an activity in the DIFC where such activity is deemed to constitute a “Financial Service” under the DFSA Regulations, must first obtain an appropriate licence from the DFSA to carry on that activity.  In particular, Article 41 of the DIFC Regulatory Law provides that a person shall not carry on a “Financial Service” in or from the DIFC and the DFSA makes rules defining what constitutes a Financial Service. Article 42(3) of the Regulatory Law permits a firm to carry on a Financial Service in or from the DIFC if the DFSA has granted it a licence authorising it to do so.

The DFSA has created a “Categorisation of Authorised Firms” which sets out the specific activities which are permitted to be carried out under each category of licence granted by the DIFC. There are five main categories in total.

In order to establish a LTD as a regulated entity, an initial meeting would usually take place between the applicant (and/or its appointed advisor), a DIFC Business Development Manager and a representative of the DFSA during which the activities intended to be carried out by the DIFC company would be outlined and the registration and regulatory process would be discussed.

Following the initial meeting, a letter of intent should be submitted to the DIFC Business Development Manager (copying the DFSA representative) which should set out: (a) the intended activities of the company and the category of Financial Service licence being sought; (b) the reasons for setting up in the DIFC; (c) details of the intended directors and corporate structure of the company; (d) details of the persons who will be based at the DIFC company to carry out the specific licensed functions outlined in the DFSA Rulebooks; and (e) office space requirements for the company.

Following submission of the letter of intent, a draft Regulatory Business Plan (including three years of financial projections) should then be submitted to the DFSA which sets out the strategy and rationale for establishing a regulated entity in the DIFC and should also outline how the business will be managed and controlled. The DFSA conduct an initial review the Regulatory Business Plan following which a meeting with the DFSA will be arranged to discuss any feedback and comments which the DFSA has.

The Regulatory Business Plan should then be finalised (taking into account any comments made by the DFSA) and formally submitted to the DFSA along with the relevant DFSA application forms. The DFSA would need to be satisfied that the DIFC Company meets the DFSA “Fit and Proper” test. In general “Fit and Proper” means the ability to carry out a Financial Service competently with honesty and integrity.

If the DFSA approves the application, it will issue an “in-principle” approval letter which will allow the applicant to complete the process with the ROC as set out for non-regulated entities above. Upon the applicant becoming successfully registered with the ROC, the required share capital amount should be deposited into the DIFC company’s bank account (the amount of share capital required to be deposited will depend on the base capital requirement stipulated in the DFSA Rulebooks for the category of licence obtained by the company). The DFSA will then issue a licence to the DIFC company.

Timing

The process for establishing a non-regulated entity will usually take from four to six weeks from the date on which the full application is submitted to the DIFC Business Development Team.

As regards regulated entities, the DFSA will usually aim to complete a final review and recommendation within fifty business days of receipt of the final application following which it normally takes two to four weeks to finalise the process with the DIFC ROC.

However, the speed with which the application is progressed largely depends on the efficiency of the applicant in preparing the relevant information and documents for submission and the manner in which the application is presented to the DIFC Authority/DFSA. In the event of complications in the process or an incomplete or unclear application being submitted, the process is likely to be significantly delayed.

Costs

The fees payable to the DIFC Authority for establishing a company (LTD) include:
US$ 8,000 – Company licensing application fee (once-off)
US$ 12,000 – Company annual licence fee (recurring)
The fees payable to the DFSA in the case of a regulated entity will depend on the category of licence obtained by that entity and can range from USD 15,000 to USD 70,000 (recurring).

Conclusion

The DIFC is a global financial centre which is unique to the region. It is currently the only dedicated financial free zone with the level of developed infrastructure required to operate sophisticated fund, corporate and financial structures. The DIFC is now a key regional financial centre and has gained significant confidence in the financial community as a result. If you are interested in setting up a presence in the DIFC please contact Sameer Huda or Marisa Finnerty for further information.

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE.