DIFC is one of the world’s top ten onshore financial centres 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.
The Dubai Financial Services Authority, or DFSA, acts as the independent regulator of fund managers and investment funds setup in the DIFC, which provides a high degree of comfort to individual and professional investors. The DIFC offers both Domestic Fund Manager and External Fund Manager licenses, both of which allow for the management of Public, Exempt and Qualified Investor Funds. The DIFC Registrar of Companies (ROC) offers multiple fund structures, included open-ended and closed ended investment companies, and GP-LP structures.
With DIFC Funds, Fund Managers can target the GCC market, and the wider MENASA region, taking advantage of the numerous Double Taxation Avoidance Treaties that the UAE has in place. Zero-rate personal and corporate tax also make the DIFC an attractive destination to setup and manage investment funds.
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
- Zero tax for 50 years on profits, capital or assets from 2004
- Zero tax on employee income
- Highly regarded, independent regulator
- Independent, English-speaking, common law judicial system
- Distinct from the UAE legal system
- Risk-based regulatory approach
- 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
- 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
Types of Funds
Public Funds are open to Retail Clients (as defined by the DIFC), and hence subject to higher levels of regulation. The other features of a Public Fund in the DIFC are:
- No minimum subscription limit;
- Units are offered to the general public;
- Can have any number of unit-holders; and
- Have to comply with IOSCO principles.
Exempt Funds are open only to Professional Clients (as defined by the DIFC). The other features of an EF are:
- Minimum subscription of US$ 50,000;
- Can have only 100 or fewer unit-holders; and
- Units are offered to persons only by way of a Private Placement.
Qualified Investor Funds
Qualified Investor Funds are open only to Professional Clients (as defined by the DIFC). The other features of a QIF are:
- Minimum subscription of US$ 500,000;
- Can have only 50 or fewer unit-holders; and
- Units are offered to persons only by way of a Private Placement.
A Fund Manager must be authorised by the DFSA to conduct Islamic Financial Business or an Islamic Window before setting up an Islamic Fund. Also, the Fund Manager is required to:
- Appoint a Sharia Supervisory board to the Fund;
- Have Sharia-compliant systems and controls;
- Maintain Islamic business policies and procedures manuals; and
- Obtain approvals from the Sharia Supervisory board, for the relevant fund documents.
A hedge fund is an investment fund that pools capital from professional or institutional investors and invests these monies in a portfolio of assets, often with complex portfolio construction and risk management techniques.
The DFSA mandates that the Fund Manager of a DIFC Hedge Fund must ensure effective risk-management of the fund. This is usually possible by:
- Making sure that certain duties are adequately segregated (for example, the of the investment function and the Fund valuation processes)
- Adhering to the best practice guidelines stipulated in the DFSA Hedge Fund Code of Practice.
Private Equity Funds
A private equity fund makes investments in the equity and debt of privately-held companies (sometimes listed entities as well), focusing on the long-term potential of the acquisition, much like private-equity firms.
In the DIFC, Private Equity Funds are closed-ended and open to only Professional Investors. A DIFC PE Fund can be either an Exempt Fund or a Qualified Investor Fund.
Venture Capital Funds:
These funds operate much like the PE funds described above, however, they are usually limited to stakes in startups and smaller companies with high-growth potential. The VC-stage of the investment cycle of a startup comes before a PE stage, and hence these investments are characterized by smaller ticket sizes and higher risks.
In the DIFC, Venture Capital Funds are also closed-ended and open to only Professional Investors. A DIFC VC Fund can be either an Exempt Fund or a Qualified Investor Fund.
Property Funds in the DIFC invest predominantly in real estate-related assets. These are closed-ended Funds. There are certain restrictions on DIFC Property Funds that are Public Funds, and these include being able to only invest in physical property (or property-related assets), getting listed within 6 months and an 80% (of NAV) limitation on its borrowing.
A carveout is Real Estate Investment Trusts, or REITs, the most well-known of them being Emirates Reit (https://www.reit.ae ).
Setting up a fund structure in the DIFC
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.
Contact us to discuss your fund requirements today!