Dubai: Law of Offshore
International Financial Centre Law
During 2002, the Dubai authorities developed plans for the Dubai International Finance Centre (DIFC), which was launched in 2003.
The DIFC published its proposed regulatory structure for consultation in June 2003.
In July 2003, the UAE Federal Cabinet approved a Federal Decree allowing the DIFC a large degree of sovereignty. The approval of the Decree, which allowed for Financial Free Zones to be established in the UAE, marked a significant step forward for the Centre, which hosted a summit between the World Bank and the IMF in September.
Asset management companies, banks, and other financial service providers which establish headquarters in the Dubai International Financial Centre (DIFC) are permitted to do business with locally-based high net worth individuals. DIFC Regulatory Authority chief executive, Phillip Thorpe explained in October 2002, that although DIFC-based firms would not be allowed to enter into the retail market in Dubai, they will be permitted to deal with individuals whose net worth exceeds Dh5 million.
The DIFC has a separate set of laws, comprising a comprehensive set of regulations like company law, legislation on property rights, including laws on security and collateral, title to goods and securities, commercial transactions and contracts, and insolvency and data protection.
The Regulatory Authority issues rules to prevent money laundering, requiring a licensed institution in DIFC to appoint an appropriately qualified money laundering reporting officer.
The Dubai Financial Services Authority (DFSA) has created a number of laws and amendments since 2004 and are available on the DFSA website. These include:
- Regulatory Law;
- Companies Law*;
- Law on the Application of Civil and Commercial Laws in the DIFC;
- Law Relating to the application of DIFC Laws;
- Limited Liability Partnership Law;
- Contract Law;
- Insolvency Law;
- Arbitration Law;
- Data Protection Law;
- Commercial Court Law;
- General Partnership Law; and
- Markets Law.
*now updated, see below for more information.
In April, 2004, a new federal law allowing financial free zones to be established in the United Arab Emirates (UAE) received the signatures of the Supreme Council, comprised of the rulers of each of the Emirates, and following its publication in the government gazette, came into force.
Chief executive of the DIFC, Naser Nabulsi observed that: "The Financial Free Zone Law recognises the unique nature and importance of the concept of the Dubai International Financial Centre. We are delighted that this law is now finalised."
He went on to add: "Its publication is great news for many of the world's leading financial services businesses who have endorsed the DIFC by applying for a licence to operate here or by issuing a letter of intent to apply."
Chief executive of the Dubai Financial Services Authority, Phillip Thorpe also welcomed the finalisation of the legislation, suggesting that: "This development is another step towards ensuring Dubai becomes a world-class financial centre, supported by laws and regulations of the highest international standard."
In July, 2004, The Dubai Financial Services Authority (DFSA) released a consultation document detailing proposed legislation to govern Islamic financial operations in the Dubai International Financial Centre (DIFC).
The paper called for comment on two new pieces of draft legislation: the Law Regulating Islamic Financial Business, which creates the regulatory framework for the conduct of Islamic financial business in or from the DIFC; and the Islamic Financial Business (ISF) module of the DFSA Rulebook, which sets out the requirements for an Authorised Firm undertaking Islamic financial business.
It also detailed amendments that will be made to other modules of the DFSA Rulebook as a consequence of the new Law and Module being enacted.
'The new draft Islamic Finance Law and Rulebook module are key components of the financial services legislation for the DIFC. Together with the specific prudential requirements already set out in our integrated prudential rules, they will provide a comprehensive regime for all aspects of Islamic financial business conducted in or from the DIFC', DFSA Chief Executive, Mr Thorpe explained.
Following the introduction earlier that year of Federal Decree No. 35, which specifically established the DIFC as a Financial Free Zone in Dubai, Sheikh Mohammed bin Rashid Al Maktoum acted decisively in July 2004 to guarantee the independence of the DFSA, giving his personal commitment to the independence of the DFSA and declaring that this will be formally enshrined in the Dubai Law which will signal the launch of the DIFC.
In his letter, His Highness said: "We hereby assure you of our strong commitment to the highest standards of transparency and of good governance throughout the DIFC. These standards are very important for the launch and for the continuing development of the Centre. Accordingly, we instruct you to secure these high standards wherever they are relevant in the DIFC. They include transparency and good governance in handling conflicts of interest (whether actual or perceived). You are invited to apply these standards in your own affairs, and to offer advice to others of what is required”.
Dr. Habib Al Mulla, Chairman of the DFSA Regulatory Council, added at the time that: "The way is now clear for the DIFC when it launches, very soon, to become the powerful engine of business and employment creation that our region needs.
The Regulatory Council is grateful to His Highness for the speed and decisiveness with which he has acted. I would like to pay tribute also to the expert and dedicated staff of the DFSA for the way they have put in place all the building blocks of what can now be seen as a regulatory authority of genuine world quality."
David King, Acting Chief Executive of the DFSA added: "This is an historic decision because it means the DFSA will be the first regulator in the region free to operate on the same independent basis as our counterparts in the major centres such as London, Hong Kong and Wall Street. We have already drafted and completed in record time an entire legal and regulatory environment based on global best practice. We now have the operational independence needed to give confidence to the global leaders in banking and international finance to base their own regional operations in the DIFC. The decision will also give confidence to other jurisdictions and international bodies that the DIFC will be an entirely trustworthy addition to their ranks. Any reservations there may have been can now safely be set aside”.
In June of 2005, the late Ruler of Dubai, Sheikh Maktoum Bin Rashid Al Maktoum enacted five new laws dealing with legal obligations, employment and security interests in relation to the Dubai International Financial Centre, and the Board of Directors of the Dubai International Financial Centre Authority has issued additional company regulations.
The legislation comprised:
- Employment Law No. 4 of 2005. This law provides for minimum employment practices comparable to established international standards, so as to promote fair treatment of employees and employers;
- Law of Obligations No. 5 of 2005. This law creates a framework for claimants to seek recovery for non-contractual claims and sets out the rules as to when obligations arise and how disputes involving them are resolved;
- Implied Terms in Contract and Unfair Terms Law No. 6 of 2005. This law provides for fairness and certainty in contracts governed by the laws of the DIFC by providing terms and conditions not normally included in contracts and assures the necessary framework for their enforcement;
- Law of Damages and Remedies No. 7 of 2005. This law creates the structures necessary to assure the recovery of damages and other forms of relief to claimants within the DIFC; and
- Law of Security No. 9 of 2005. This law defines various forms of security interests as collateral for repayment of debts and prescribes the process for their perfection and enforcement.
Then in September of that year, a number of new laws and regulations governing activities within the DIFC, including those dealing with personal property, insolvency, collateral security, and the use of electronic stock instruments were enacted.
The new laws were:
- The Personal Property Law No. 9 of 2005. This law defines the rights and obligations of parties in relation to property other than real estate (land and buildings) located in the DIFC and, among other things, segregates property belonging to account holders of the Dubai International Financial Exchange (DIFX) from the property of the DIFX itself.
- The Law Relating to the Application of DIFC Laws (Amended and Restated) No. 10 of 2005. This law, initially passed in September of 2004, has been amended to harmonize defined terms appearing in the 2004 version of the law with terms used in the Personal Property Law as relates to DIFX operations.
The regulations consisted of the DIFC Dematerialization of Securities Regulations, DIFC Security Regulations and DIFC Insolvency Regulations which are issued by the Board of Directors of the DIFCA pursuant to the authority given to the Board by Law No. 9 of 2004.
The regulations, respectively, provided for the issuance, trading and registration of securities in electronic form as required to expedite DIFX operations; the creation, recordation and enforcement of various forms of collateral security as guarantees for the payment of loans and other debt; and the procedures and formalities governing the dissolution and winding up of insolvent companies.
In 2006, amendments to the Companies Law came into force.
The amendments sought to simplify dividend distribution requirements for companies, thus providing greater incentives for companies to list on the Dubai International Financial Exchange (DIFX).
The amendments also created a Limited Liability Company (LLC) structure for non-regulated companies by the Dubai Financial Services Authority, which simplifies corporate administration formalities for the principals of LLCs whose activities are not regulated by the DFSA.
Also in 2006, amendments to the DIFC's Limited Partnerships Law came into force, which were aimed primarily at establishing a purpose-built vehicle for the formation and operation of fund management activities in the DIFC.
The Limited Partnership Law deals with matters such as formation and registration of a limited partnership, rights and obligations of general and limited partners, dissolution of the limited partnership and migration of limited partnerships to and from the DIFC. The regulations provide the details of the process for registration and operating a limited partnership in the DIFC.
The Limited Partnership Law follows the enactment in 2004 of the Companies Law, the General Partnership Law and the Limited Liability Partnership Law to further extend the range of the company formation offering of the DIFC in accordance with international best practices.
In 2007, the Real Property (DIFC Law No.4 of 2007) and Strata Title ( DIFC Law No.5 of 2007), as well as Regulations complementing these laws, were enacted by Sheikh Mohammed Bin Rashid Al Maktoum. The Laws and Regulations were effective immediately.
The Real Property Law guarantees ownership of freehold land and buildings, and other interest in land, within the DIFC. The Law is based on the underlying principles of English common law, but also incorporates the Torrens system of land registration, well known in countries such as Australia, New Zealand, Canada and Singapore.
Under the Real Property Law, land transactions are registered in a central register administered in the DIFC. Once registered, the Law certifies them to be fully effective. Unlike some other systems of land registration, title interests registered under the Real Property Law are “indefeasible”. In practical terms, this means that persons buying real estate in the DIFC, lending on the security of real estate in the DIFC, or taking a lease of real estate in the DIFC, can be assured that their investment is backed by the full protection of the Law.
The Strata Title Law establishes a system of guaranteed freehold title to units in buildings in the DIFC. It is based on a system originally developed in Australia, but now in use in many countries around the world, including in particular Singapore. The Law combines the benefits of guaranteed title under the Real Property Law with an administrative structure designed to handle the day-to-day management of buildings. It is designed to help overcome the complexities of co-owners association constitutions, master community declarations, and the like, by introducing a simple but comprehensive system of rights and responsibilities. It incorporates many of the key concepts of existing co-owners association arrangements already in use in Dubai, but simplifies them and adds a title guarantee.
Also in 2007, the DIFC issued a revised Data Protection Law (DIFC Law No. 1 of 2007), which prescribed rules and regulations regarding the collection, handling, disclosure and use of personal data in the DIFC, the rights of individuals to whom the personal data relates, and the power of the DIFC Authority in performing its duties in respect of matters related to the processing of personal data as well as the administration and application of the Law.
Businesses and in particular, banking and financial organizations, are increasingly processing and exchanging individual data electronically. The DIFC Data protection Law embodies international best practice standards, and is consistent with EU directives and OECD guidelines and is designed to balance the legitimate needs of businesses and organizations to process personal information while upholding an individual’s right to privacy.
In February 2008, the Dubai International Financial Centre issued consultation papers seeking comment on a new arbitration law. This has since replaced the Centre's previous arbitration law.
The law, which contains a significant number of enhancements, is designed to accommodate and facilitate the set-up of the DIFC's Arbitration Centre.
The changes, drafted in consultation with internationally renowned arbitration practitioners, are designed to make the arbitration law practical and comprehensible to all arbitration practitioners. They make the system simpler, more manageable, and therefore more attractive to the international community.
One of the main changes to the DIFC arbitration law is the adoption of the UNCITRAL Model Law, with amendments aimed at improving its provisions. Another important change is specifically set to widen the scope of arbitrations which the law governs, to include all types of arbitrations and parties opting to arbitrate at DIFC.
According to the DIFC, in drafting the new law, all aspects of legislation necessary to accommodate the unique set-up of the DIFC jurisdiction and legal framework were taken into consideration, as well as the importance of overcoming hurdles presented by the region's unique market conditions and dynamics.
Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, enacted the new DIFC arbitration law (DIFC Law No. 1 of 2008) on September 1, 2008.
In November 2008, the DIFC released its proposed updates on Companies Law and Insolvency Law for public consultation.
The Companies Law has been updated to include the registration requirements laid down by the DIFC Registrar of Companies. The Insolvency Law has been updated to include changes in applications and procedures for winding up Protected Cell Company (PCC) structures used by insurers to provide an easy and cost-effective way for smaller organizations to establish captive insurance units.
Omar Bin Sulaiman, Governor of the DIFC said: “The updates to the Companies Law and the Insolvency Law are part of DIFC’s effort to upgrade our regulations in response to the industry’s needs and concerns. DIFC’s regulatory framework, created by incorporating best practices from jurisdictions across the world, has been constantly evolving since its establishment to offer a high degree of security, protection and ease of operations for financial services companies.”
It was expected that following the consultation process, the Companies Law and the Insolvency Law will be presented to the Ruler of Dubai for enactment.
In the same month, the DIFC announced that it had enacted new regulations that enable companies within the financial district to quickly form Special Purpose Company (SPC) structures.
The new regulations allow companies to create SPCs for facilitating both Islamic and conventional transactions as well as vessel registrations. Transactions that can be facilitated by the new law include acquisitions and financings.
Under the law, Special Purpose Companies can be easily structured and incorporated, while enjoying exemptions from some filing and disclosure rules relating to conventional companies in DIFC. For example, they are not required to hold annual shareholder meetings, can be administered by a corporate service provider and are not required to file annual returns.
The SPC Regulations further enhance the position of DIFC as a jurisdiction having a wide breadth of laws where all facets of commercial transactions can be conducted. They also put DIFC on a par with key offshore jurisdictions that offer the ability to establish Special Purpose Companies.
The procedures for setting up an SPC under the DIFC Registrar of Companies are quick and straightforward. The process involves inexpensive fees and minimal annual reporting requirements.
In October, 2009, the Dubai Financial Services Authority issued a Consultation Paper setting out proposals to enhance the clarity and accessibility of the Islamic finance rules of the Dubai International Financial Centre (DIFC). Following the consultation, the DIFC published five electronic handbooks for Islamic finance in March, 2010.
Each handbook contains the parts of the DFSA Rulebooks which apply to that particular area of activity namely:
- Islamic Banking;
- Islamic Investment Business, other than Operating Funds;
- Islamic Insurance;
- Islamic Insurance Intermediation and Management; and
- Operation of Islamic Funds.
The Chief Executive of the DFSA, Mr Paul Koster said: "Islamic finance has witnessed tremendous growth and as such is an important area of focus for the DFSA. We want to provide the industry with improved access to our framework of Laws and regulations which is why we have created the Islamic finance tailored handbooks. By improving our delivery of information to Firms conducting Islamic finance activities, we hope that the handbooks will help Firms access the requirements that apply to their Islamic finance activities more easily."
In December 2012, the DIFC Authority confirmed the enactment of four new laws, the Employment Law Amendment Law, the Real Property Law Amendment Law, the Data Protection Amendment Law, and the Non-Profit Incorporated Organisation Law, by Sheikh Mohammed Bin Rashid Al Maktoum, the ruler of Dubai.
The Non Profit Incorporated Organisations Law introduces a new regime for non-profit organisations whose purpose is to support the growth and development of the financial services sector in the DIFC. Under the new legislation, non-profit organisations wanting to establish in the DIFC will have to incorporate as bodies corporate, founding members have to be residents of the UAE and they may only carry on authorised activities as defined in the Non Profit Incorporated Organisations Law.
The amendments to the Employment Law, Real Property Law and Data Protection Law seek to provide greater legal certainty by addressing a number of deficiencies and impracticalities which have been identified since the establishment of the DIFC in consultations launched in December 2011.
The four laws will come into force on December 23, 2012 and have been made available online. The Board of Directors of the DIFC Authority also made regulations under the Non Profit Incorporated Organisations Law and the Data Protection Law, which will also come into force from this date.