DIFC Open-ended & Closed-ended Investment Funds - 10 Leaves

  • 20-03-2020
DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the MENASA region.

 

DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.

Why setup an investment fund in the DIFC?

The DIFC is a leading financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and world-class standard of living. It is well regarded in the international community as well.

You can read more about DIFC Investment Funds here:

https://10leaves.ae/publications/difc/investment-funds-in-the-difc

Specific Advantages:

Here are some specific advantages of establishing in the Dubai International Financial Centre:

LEGAL AND REGULATORY FRAMEWORK:

  • Legal framework supports cross-border activities.
  • 100% foreign ownership permitted.
  • No restriction on foreign talent or employees.
  • No restrictions on capital repatriation.

TAX BENEFITS:

  • Zero tax for 50 years on profits, capital or assets from 2004.
  • Zero tax on employee income.

COUNTERPARTY CONFIDENCE:

  • Highly regarded, independent regulator.
  • Independent, English-speaking, common law judicial system.
  • Distinct from the UAE legal system.
  • Risk-based regulatory approach.

DIVERSE ECOSYSTEM:

  • Central to regional deal making.
  • High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions.
  • World-class regional and international law and auditing firms, and other professional services.
  • The largest fund domicile in the region.

GEOGRAPHIC EPICENTRE:

  • Management offices, holding companies and family offices are located closer to the assets they own or manage.
  • The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy.
  • Dubai plays a central role in the growing South-South trade, principally between Asia and Africa.
  • Well-positioned to harness the potential of emerging markets.

DIFC OEIC and DIFC CEIC vehicles:

Funds that are structured as companies, have two main options in the DIFC.

Open-ended Investment Company (OEIC)

Closed-ended Investment Company (CEIC)

There are many considerations that go into choosing a legal structure for a fund. Some of them being – the jurisdiction of choice, the fee structure, tax considerations and the like. The choice between open-ended and closed-ended vehicles for DIFC investment funds however, depends a lot on the investment objective and fund strategy.

The basic difference between an open-ended and a close-ended fund is the option of liquidity, i.e. whether investors (or unit holders) are allowed redemptions. Open-ended funds allow periodic redemptions on certain days, depending on how frequently the Net Asset Value (NAV) of the fund is calculated. For heavily traded funds, this can be daily as well. Most private funds however, have longer NAV periods, ranging from monthly, to quarterly. Closed-ended DIFC funds however, have no such provisions. They are essentially illiquid, due to the nature of the underlying investments. Such funds are usually property or venture capital funds, that require a longer commitment to the underlining investment objectives. These funds have to be closed-ended, since it would not be practical to fulfil periodic redemption requests by selling off the underlying assets. Some closed-ended funds do have an exit option – solely at the discretion of the directors, and at a steep exit fee.

           

Differences in DFSA regulation:

Due to their nature, open-ended DIFC funds are subject to more regulation than closed-ended ones. While the DFSA does not over-regulate Exempt Funds and Qualified-Investor Funds, since they are open to Professional clients only, it does have certain allowances for closed-ended funds, such as waiving the requirement for a fund administrator and internal audit. Open-ended funds for instance, would have to appoint a fund administrator for investor servicing, NAV calculations, processing subscriptions and redemptions etc. 

Lock-up periods and side pockets:

Some funds have a bit of both. Lock-up periods (of 6 months to a year, sometimes more) are used by some fund managers of OEIC fund structures, to discourage early redemptions in open-ended investment funds. In such cases, redemption requests may attract a steep exit fee. Other funds have a separate share class for illiquid investments, and this share class is treated as a closed-ended fund, where redemptions are not allowed.

Setting up a fund in the DIFC requires either a) setting up a Domestic Fund Manager or b) licensing an existing fund manager in a recognized jurisdiction, to act as the External Fund Manager of the DIFC fund. Read this article to know more about the licensing process and associated costs.

 

Our services include assistance in:
1. Reviewing the fund structure and advice on the applicable regulatory framework;
2. Preparation of the Regulatory Business Plan and comprehensive financial projections;
3. Preparation of all policies, processes and manuals required;
4. Provision of Outsourced Compliance Officer and Outsourced Finance Officer services;
5. Finalising the legal structure, including holding company setup and customisation of Memorandums;
6. Preparation of complete fund documentation, including Private Placement Memorandums, Subscription Agreements and Fund Constitutions;
7. Assistance in finalisation of all service providers, including Fund Administrators, External and Internal Auditors; and
8. Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.

 

Contact us to discuss your fund requirements today!

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