A Quarterly Newsletter from UAE and Oman member firms of the PKF International Ltd.

VOL 12, Issue 3 July 2010

DIFC – THE FINANCIAL FREE ZONE

Overview

Dubai has been opening up new avenues for economic growth and positioning itself on the world map as the regional hub for international business. Among its bold and pioneering initiatives has been the creation of the Dubai International Financial Centre (DIFC). The DIFC is a wholesale, onshore financial centre for leading financial services institutions and service providers interested in conducting business in the region.

The DIFC was conceived by the Government of Dubai for the benefit of the UAE and the wider region as a whole, with a remit to create a regional capital market, offering investors and issuers of capital world-class regulations and standards.

Benefits of establishing in DIFC

In addition to the federal benefits offered by the UAE, companies registered in the DIFC also benefit from:

  • A wholly transparent operating environment, complying with global best practices;
  • A dollar denominated environment;
  • Internationally accepted laws and regulatory processes; and
  • International legal system based on Common Law of England and Wales.

The DIFC is a wholesale, onshore financial centre for leading financial institutions and service providers interested in conducting business in the region.

Structure of the DIFC
The DIFC has three independent bodies, the DIFC Authority, the Dubai Financial Services Authority (DFSA) and the DIFC Judicial Authority (DJA). The DIFC Authority is primarily responsible for the development of overall strategy, providing direction to centre, and incorporating / registering entities in DIFC. The DFSA and DJA form the regulatory and legal framework of DIFC.

Legal and regulatory framework
Autonomous Regulator: The DFSA is the sole independent regulator of all financial and ancillary services conducted through the DIFC. The DFSA has been created by statute and is entirely independent of the DIFC. The primary aim of DFSA is to identify, assess, and mitigate any risk to DIFC.

Independent Courts System: The DIFC also has an independent court and arbitration centre (DCC). The DCC resolves disputes by applying its own laws and regulations rather than the UAE laws and regulations. DCC ensures the highest international standards of legal procedure and the flexibility and efficiency expected by the world’s best financial institutions.

Focus sectors of theDIFC
DIFC primarily caters to institutional investors with focus on the following sectors:

  • Banking and brokerage (investment banking, corporate banking and private banking);
  • Capital markets (equity, debt instruments, derivatives and commodity trading);
  • Wealth management (asset management, fund registration and family office);
  • Reinsurance and captives;
  • Islamic finance;
  • Business processing operations; and
  • Ancillary services (legal and accounting firms).

All of these activities are regulated by the DFSA. In addition to these regulated activities, there are a number of entities providing non-regulated services, supporting the activities of the regulated entities and those seeking to join the DIFC.

DIFC business activities

Business Activity Description of activities
Financial services Regulated by DFSA
Authorised Firms (AF) Businesses engaged in financial services
Ancillary Service Providers (ASP) Businesses engaged in the provision of legal or accounting services
Authorised Market Institutions (AMI) Businesses engaged in operating an exchange and/or a clearing house
Non-financial services * Non-regulated

* Business not engaged in financial services, i.e. business infrastructure, corporate offices, and professional services, other than law and accounting firms, and other firms not involved with financial services.

The financial activities prohibited in the DIFC primarily include deposit taking from the State’s markets; dealing in UAE Dirhams by banks; insurance business with individuals; and direct insurance of risks located in the UAE.

Authorised Firms (AF): Authorised Firms in the DIFC are categorized into five distinct license categories depending on the type of activity that the firm will be undertaking. Each of these categories of licence has its own rules and capital requirements.
The financial services described under each group are the determinants for the relevant category.

Category 1 Accepting Deposits Providing Credit
Category 2 Dealing in Investments as Principal
Category 3 Dealing in Investments as Agent Providing Trust Services Managing Assets Providing Custody
Operating a Collective Investment Fund Acting as the Trustee of a Fund Managing a profit sharing investment account Arranging credit or deals in investments
Category 4 Arranging Credit or Deals in Investments Advising on Financial Products or Credit Operating an Alternative Trading System Providing Fund Administration
Insurance Management Arranging Custody Insurance Intermediation
Category 5 An Islamic Financial Institution

Apart from offering financial services specified under a particular Category, the Authorised Firm can also provide services included under lower categories. For instance, an AF in Category 1 can additionally offer financial services as listed under Category 2, 3 and 4; however, the reverse is not permitted.

Ancillary Service Providers (ASP): under the DFSA definition, ASP’s include law firms and accounting firms that at the time of application provide services to one or more licenced institutions.

Authorised Market Institutions (AMI): under the DFSA definition, AMI’s include entities which carry on, or intend to carry on, the financial service of operating an exchange and/or a clearing house in, or from, the DIFC.

Non-financial services: Non-financial entities, also referred to as non-regulated entities, are those entities which are set-up within the DIFC; however their core business activities do not fall under the Financial Services category. These entities do not carry out any of the businesses set out under AF, ASP or AMI.

DIFC allows for the establishment of 100% foreign owned companies, either as a branch of a foreign company or as a newly incorporated company within the DIFC.

DIFC legal entities
Every entity that wishes to conduct business from or within the DIFC needs to apply for incorporation or registration. The set of application forms and supporting documents are required to be submitted to the office of Registrar of Companies (ROC). These documents differ depending on the type of legal entity to be established.

DIFC entities’ ownership pattern
The DIFC allows for the establishment of 100% foreign owned companies, whether as a branch of an already existing foreign company or as a 100% incorporated company within the DIFC.

The types of legal entities that can be incorporated/ registered in DIFC vary for financial services, and non-financial services. The principal forms of legal entities available within DIFC include:

  • Company Limited by Shares (LTD)
  • Limited Liability Company (LLC)
  • Limited Liability Partnership (LLP)
  • Limited Partnership (LP)
  • General Partnership (GP)
  • Branch of a Foreign Entity (Recognised Entity)
  • Representative office

The LTDs, LLCs, LLPs and LPs are “incorporated” entities, having separate and independent legal status from their incorporator(s). The Recognized Company and Recognized Partnerships are “registered” entities and, as such, are extensions of the foreign-incorporated company/ partnership through whose head office it is registered in the DIFC.

DFSA Authorisation
The DFSA applies stringent criteria to determine who may be authorised, registered or granted a license to conduct financial or professional services in, or from the DIFC.
The DFSA assesses the financial soundness, operating standards and integrity of the firm, and any of its group entities.

The DFSA is the sole independent regulator of all financial and ancillary services conducted through the DIFC.

Estimated time frame for authorisation: The timeline for DFSA authorisation depends on the scale and complexity of the business, as well as the timely submission of information by applicants and any responses to requests for further clarification. The estimated timeline for the issue of licenses for financial services can be summarized as follows:

Description Estimated timeline*
Authorised Firms 50 days
Ancillary Service Providers 30 days
Authorised Market Institution 90 days

* From date of receipt of completed application

Accounting and Prudential reporting requirements: The companies regulated by DFSA are required to comply with the internal audit requirement in accordance with the DFSA / DIFC laws, rules and regulations.

The accounting and prudential returns must be submitted on time, in line with the DFSA regulatory reporting calendar specified for each category.

Procedure for setting up in the DIFC
Regulated entities (excluding AMI): A graphical representation of the steps involved in incorporation / registration of a financial entity in the DIFC is provided below. These procedures are applicable to both AF’s and ASP’s regulated by the DFSA.

DIFC licensees are not subject to the UAE or Dubai financial and banking legislation, except for the UAE Central Bank’s anti-money laundering regulations and the Federal Penal Code, imposed within the UAE.

AMI entities: There are no specific application forms for AMI entities. Prior to actual incorporation, an applicant applies to the DFSA which will consider the merits and suitability of the applicant. Where the DFSA thinks it appropriate, it may authorize an applicant to carry on either, or both, of the financial services of operating a clearing house or operating an exchange. Once authorised by DFSA, the applicant can register with ROC for company incorporation.

Non-financial entities: These companies not engaged in financial or ancillary services that intend to establish themselves in the DIFC must go through a detailed assessment of the business plan by the Registration Review Committee (RRC) followed by company registration with the ROC.

Capital requirement
Authorised Firms: Each of the five categories of AF has its own capital requirements, as specified in the table below:

Authorised Firms Base capital requirement
Category 1 USD 10 million
Category 2 USD 2 million
Category 3 USD 500,000
Category 2 or 3 that provide custodial services to collective investment funds or are depositories of mutual funds/ open ended investment companies USD 4 million
Category 4 USD 10,000
Category 5 USD 10 million

Ancillary Service Providers: There are no minimum capital requirements for ASPs. However, ASP’s must be able to meet their liabilities as,and when they fall due.

In summary…
Whilst, the UAE offers a well developed and structured business environment for operating in the country, the DIFC, as a recognised and independent financial centre, offers a well organized and controlled business environment designed to attract regional liquidity into investment opportunities within the region and contribute to its overall economic growth. As a result the DIFC is emerging to meet the growing financial needs and requirements of the region, while strengthening links between the financial markets of Europe, the Americas and the Far East.

What we can do for you
PKF as part of its services in the DIFC assists clients in forming entities therein, preparation of business plans and financial projections related thereto, and provision of internal audit, accounting and payroll processing services.

(This article has been contributed by Ms. Priya Kapoor, an Assistant Manager in our Management Consulting Department)