Tag: DIFC – Dubai International Financial Centre

The new DIFC prescribed company regulations

The Dubai International Financial Centre (DIFC) has introduced the DIFC Prescribed Company Regulations 2024 (the 2024 Regulations), replacing the DIFC Prescribed Company Regulations 2019 (as amended in 2020 and 2022) (together the Former Regulations). The 2024 Regulations came into effect on 15 July 2024 and expand the range of applicants eligible to incorporate a so called “prescribed company” in the DIFC.

 

Evolution of eligibility criteria

 

Under the Former Regulations, the following could establish a prescribed company in the DIFC:

 

1.) Qualifying Applicants: entities that could demonstrate an existing nexus to the DIFC, such as already being registered within the DIFC or affiliated with a DIFC-registered entity, or meeting specific criteria (e.g., being an ‘Authorised Firm’ or a ‘Government Entity’).

 

2.) Qualifying Purpose Applicants: applicants engaged in specific activities such as ‘Structured Financing,’ ‘Aviation,’ or ‘Crowdfunding Structures’.

 

Key changes

 

Expanded eligibility

 

The 2024 Regulations require that an applicant wishing to incorporate or continue a prescribed company in the DIFC must satisfy the DIFC Registrar of Companies of one of the following criteria:

 

1.) the prescribed company is controlled by:

 

GCC Persons: individuals who are citizens of a GCC member state, bodies corporate controlled by citizens of a GCC member state, entities with securities listed on a GCC exchange, and so called ‘Government Entities’;

 

Registered Persons: a body corporate incorporated, registered, or continued within the DIFC, excluding prescribed companies and non-profit organisations incorporated or continued within the DIFC; or

 

Authorised Firms: any person holding a license granted by the Dubai Financial Services Authority or by a recognised financial regulator within the UAE or certain other jurisdictions.

 

2.) the prescribed company is established or continued in the DIFC for the purpose of holding legal title to, or controlling, one or more GCC Registrable Assets[1].

 

3.) the proposed prescribed company is established or continued in the DIFC for a Qualifying Purpose[2].

 

4.) the prescribed company established or continued in the DIFC has a director who is an employee of a “Corporate Service Provider[3]” and that Corporate Service Provider has an arrangement with the DIFC Registrar of Companies in accordance with Regulation 3.3.2 of the 2024 Regulations.

 

Employment restriction

 

The 2024 Regulations have introduced an express prohibition on a prescribed company employing staff. This restriction does not extend to the appointment of directors.

 

Conclusion

 

The 2024 Regulations mark a significant shift in the DIFC regulatory landscape, making it more inclusive and flexible for a wider range of applicants and purposes. We anticipate that the 2024 Regulations will make the DIFC prescribed company more attractive for use in corporate structuring. ■

 

 

 

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[1] A GCC Registrable Asset is defined in the 2024 Regulations as: an asset or property interest that must registered with a GCC Authority to establish legal ownership, secure rights, or encumbrances against it, and to provide public notice of such interests, including: (a) land and real property; (b) shares in companies; (c) partnership interests; (d) intellectual property; and (e) aircraft and Maritime Vessels.

 

[2] A Qualifying Purpose is defined in the 2024 Regulations as being any of the following: (a) an “Aviation Structure”; (b) a “Crowdfunding Structure”; (c) an “Intellectual Property Structure”; (d) a “Maritime Structure”; (e) a “Structured Financing.

 

[3] A Corporate Service Provider is defined in the 2024 Regulations as: a person registered with the DFSA as a Designated Non-Financial Business or Professional that undertakes corporate services business in the DIFC.

DIFC Courts to oversee disputes in all free zones?

A survey published by the Dubai Statistics Center has called for input from the public in what appears to be research relating to the application of ‘Common Law’ in all free zones in Dubai. The survey is not about the use of ‘Common Law’ in a general sense. Instead, the Dubai government is focused on integrating DIFC laws and giving jurisdiction to the DIFC Courts for overseeing civil and commercial disputes within the free zones.

 

The DIFC

 

The DIFC is governed by its own body of laws with an independent judicial authority, the DIFC Courts. The DIFC Courts currently have jurisdiction to hear disputes in connection with an entity established in the DIFC, disputes which are connected to the DIFC or disputes in which the parties have agreed to the jurisdiction of the DIFC Courts.

 

The rules of procedure in the DIFC Courts largely follow the Civil Procedure Rules followed by the English courts. The DIFC Courts apply DIFC laws in disputes before it, unless there is an agreement to the contrary. DIFC laws are largely a codification of English common law. The DIFC Courts can also apply any other law agreed among the parties to the dispute, such as UAE law.

 

Under the current legal framework in Dubai, unless a free zone company agrees to resolve its dispute through arbitration or through the DIFC Courts, all disputes will have to be referred to the on-shore Dubai Courts. The on-shore Dubai Courts operate under a civil law system and apply UAE laws by default. Proceedings before the Dubai Courts are conducted exclusively in Arabic, whereas in the DIFC Courts they are conducted in English.

 

The Survey

 

The survey published by the Dubai Statistics Center appears to suggest that the Dubai government is considering two possible means by which the jurisdiction of the DIFC Courts and the laws of the DIFC may be extended to all free zones in Dubai: a hybrid system and a standalone system.

 

a) Hybrid System: DIFC Courts having jurisdiction with UAE laws as default

 

Under this framework, the DIFC Courts would be responsible for overseeing civil and commercial disputes within the free zone. UAE laws will be applicable by default to the dispute. However, for matters concerning litigation procedures and evidentiary rules, the DIFC laws will take precedence. This means that while disputes will be adjudicated by the DIFC Courts, the foundational laws of the UAE would influence and guide the decisions in court cases.

 

b) Standalone System: Extended jurisdiction of DIFC to selected free zones

 

In this setup, the entire legal framework of DIFC’s civil and commercial laws (excluding licensing regulations) would extend to the selected free zone. This would mean that companies in these zones will function entirely under DIFC laws and regulations (e.g. company law, bankruptcy law, employment law, etc.), with the DIFC Courts handling all respective disputes.

 

Outcomes

 

As noted above, if the Hybrid System is implemented, the DIFC Courts will have jurisdiction over any entity in any free zone in Dubai without the need for agreement among the disputing parties to submit to the jurisdiction of the DIFC Courts. However, the DIFC Courts will only apply UAE law (and not DIFC law) unless there is an agreement among the parties to apply a specific different law. In other words, the lex fori (the law of the Court) would be common law.

 

Under the Standalone System, the DIFC Courts will, in addition to having jurisdiction over disputes concerning other free zone entities, also apply DIFC Laws by default. In effect, this system will determine disputes under common law, through a common law process of court (lex fori and lex loci). It is unclear whether a non-DIFC free zone entity engaged in financial services will be subject to the supervision of the Dubai Financial Services Authority in the same manner that applies to DIFC entities. ■

DFSA Decision Notices not Findings of Fact in the DIFC Courts

The DIFC Courts have recently confirmed that Decision Notices issued by the Dubai Financial Services Authority (DFSA) are not binding on the Court as findings of fact.

 

Decision Notices

Under Article 116(2) of the Regulatory Law 2004 (as amended), the DFSA may publish, in such form and manner as it regards appropriate, information and statements relating to decisions of the DFSA, the Financial Markets Tribunal and the DIFC Court, sanctions, and any other matters which the DFSA considers relevant to the conduct of affairs in the DIFC. These include Decision Notices issued under Article 5 of Schedule 3 of the Regulatory Law in respect of Authorised Individuals who are defined as individuals who have been authorised by the DFSA to perform one or more Licensed Functions for an Authorised Firm.

 

The DIFC Claim

In the Court of First Instance case of [2018] DIFC CFI 080, the Claimant initiated proceedings against the Defendant, alleging, among other claims, that the Defendant had misappropriated funds invested by the Claimant in connection with a DFSA Authorised Firm (the Relevant Entity).

 

The Claimant sought to rely on a Decision Notice issued against the Defendant by the DFSA (and unconnected to the DIFC Claim) which referred to a series of misdoings on the part of those engaged in the business of the Relevant Entity and failures to abide by the DFSA Rules and Regulations which applied to financial advisers and investment managers as well as the Defendant’s personal responsibility for breaches.

 

The Defendant contested the admissibility and relevance of the Decision Notice in respect of the DIFC Claim.

 

The Judgment

Issuing the judgment consequent to trial, Justice Sir Jeremy Cooke held, among other things, that:
• the DFSA proceedings were “adversarial” and “disciplinary” in nature; and
• the “conclusions reached by others cannot bind [the DIFC] Court, absent the application of res judicata or specific exceptions to the rule in Hollington v Hewthorn which is binding on English Courts”.

 

The Court also referred to the English cases of Conlon and another v Simms [2006] EWCA Civ 1749 and Three Rivers DC v Bank of England (No.3) [2001] UKHL 16, [2003]2 AC 1 in support of its conclusions and confirmed that the principles set out in those cases “reflect the law of the DIFC” and apply in relation to Decision Notices issued by the DFSA.

 

Conclusion

The case is an important precedent from the DIFC Courts which considers the evidential burden to be met in establishing a claim. It also provides individuals against whom Decision Notices are issued by the DFSA an opportunity to defend themselves in claims brought against them based on the merits of each case.

However, it remains to be seen whether the DIFC Courts would take a different view if the findings in a DFSA Decision Notice directly related to a specific claim in the DIFC Courts, and were properly substantiated by direct witness evidence in relation to the Decision Notice. ■

Service of claim documents within the jurisdiction and abroad Q&A: DIFC

DIFC-specific information setting out the framework for service of claim documents (in relation to domestic and foreign proceedings) within the jurisdiction, and service of claim documents outside the jurisdiction.

Pre-action Letters: Dubai International Financial Centre (DIFC)

This Q&A focuses on Dubai International Finance Centre (DIFC) specific information on all the key issues to consider before issuing or responding to a pre-action better. Furthermore, this Q&A provides country-specific commentary on Practice note, Letter before action (Pre-action or demand letter): Cross-border, and forms part of Cross-border dispute resolution.

Recovery of trade debts Q&A: (DIFC)

This Q&A is DIFC specific information on the legal options available to parties looking to recover a trade debt including ordinary legal proceedings, special fast-track procedures (if any), insolvency proceedings and amicable settlement opportunities.

 

This Q&A also provides United Arab Emirates commentary on Practice note and Recovery of trade debts: a cross-border overview.

Rules of evidence (including cross-border) in civil proceedings Q&A: (DIFC)

This Q&A provides an overview of the rules of evidence in civil proceedings, including rules on the disclosure obligations of the parties, admissibility of evidence, witness evidence, the standard of proof, as well as issues that arise in gathering cross-border evidence.

Compliance with DIFC Data Protection Law 2020 – Deadline 1 October 2020

DIFC entities have until 1 October 2020 to ensure that their data processing activities are compliant with the new Data Protection Law (DIFC Law 5 of 2020) (the DP Law).

 

Who is subject to the DP Law? 

 

  • • DIFC entities.

 

  • • Non-DIFC entities that regularly engage with DIFC entities as part of a “stable arrangement”, which involve data being processed in the DIFC and/or transferred out of the DIFC.

 

Practical Guidance 

 

1. Maintain a record of Personal Data.

 

2. Delete Personal Data when the purpose for processing ceases.

 

3. Maintain (written) consents obtained from Data Subject(s).

 

4. Have in place technical and organisational measures.

 

5. Have in place a data protection policy.

 

6. Ensure that notification of processing operations was submitted to the Commissioner.

 

7. Have in place a legally binding agreement between: (i) Joint Controllers, (ii) a Controller and a Processor, (iii) a Processor and a Sub-Processor.

 

Additional Guidance – Entities carrying out High Risk Processing Activities

 

An entity carrying out High Risk Processing Activities has the following additional requirements:

 

8. Appoint a Data Protection Officer.

 

9. Submit an Annual Assessment to the Commissioner.

 

10. Undertake a Data Protection Impact Assessment prior to conducting High Risk Processing Activity.

 

Transfer of Personal Data outside of DIFC

 

Personal Data can be transferred outside of the DIFC if it satisfies one of the conditions under the DP Law.

 

Country with Adequate Level of Protection: Personal data can be transferred out of DIFC if the recipient country has an adequate level of protection. The Commissioner determines the countries that have an adequate level of protection.

 

Country without an Adequate Level of Protection: If the recipient country does not have an adequate level of protection, then the transfer can be done only if certain additional requirements are satisfied.

 

 

Sanctions and Compensation 

 

The sanctions are substantial for non-compliance of the DP Law with the maximum fine ranging from USD 20,000 to USD 100,000 depending on the breach.

 

Where a Data Subject suffers material or non-material damage by reason of any contravention of the DP Law, the Data Subject may apply to the DIFC Court for compensation from the Controller or Processor in addition to, and exclusive of, any fine imposed on the same parties.

 

In terms of the apportionment of liability between Controllers and Processors, where the Controller and Processor are held liable for the damages caused:

 

  • A Controller involved in processing that infringes the DP Law shall be liable for damages caused.

 

  • A Processor shall be liable for damages caused by processing only where it has not complied with the obligations specifically directed to Processors or where it has acted outside or contrary to the lawful instructions of the Controller.

 

  • Where multiple Controller(s) or Processor(s) are involved in the processing and where each is responsible for any damage caused by the processing, each shall be held jointly and severally liable for the entire damage. ■

DIFC Increases Scope and Fines

The DIFC has expanded the scope of the common reporting standards, meaning more people must make filings plus increased fines for non-compliance.

 

With effect from 16 August 2020, DIFC Law 6 of 2020 (the CRS Law Amendment Law) was enacted to amend the Common Reporting Standard (CRS) Law, DIFC Law 2 of 2018 (the CRS Law). This enactment follows the issuance of the new CRS Regulations, which came into effect on 30 July 2020.

 

Briefly, the CRS Law serves to apply CRS on the financial institutions within the DIFC (known as the ‘Reporting Financial Institutions’ in the CRS Law). CRS is a standard developed by the Organisation for Economic Cooperation and Development (OECD) by which the DIFC (and other participating jurisdictions) are required to obtain financial account information from financial institutions and automatically exchange them with the other participating jurisdictions on an annual basis. Under the CRS Law, Reporting Financial Institutions that fail to report such information shall be subject to a fine for non-compliance, ranging between USD 280 (with an additional fine per each day of non-compliance up to a limit) for a minor non-compliance and USD 70,000 for a significant non-compliance. The main purpose behind CRS is to limit tax evasion.

 

The CRS Law Amendment Law made the following changes to the CRS Law:

 

  • The CRS Law now additionally applies to a Controlling Person (as defined in the CRS Law). This means that where an account with the Reporting Financial Institution is held by an entity, the natural persons exercising control over such entity are also subject to the CRS Law.

 

  • New offences and penalties are introduced in the CRS Law. An account holder or a Controlling Person that provides inaccurate or incorrect self-certifications where he knew or ought to have known to be inaccurate or incorrect shall be fined USD 5,500. A Reporting Financial Institution that fails to obtain valid self-certifications when a new account is set up shall be fined USD 300.

 

The amendments to the CRS Law are aimed to elevate the compliance requirements of Reporting Financial Institutions thereby aligning DIFC’s legal and regulatory framework with international best practice. ■

DIFC – Innovation License

The Dubai International Financial Centre (DIFC) has recently launched a new type of license called an “Innovation License”. An Innovation License is available to technology and innovation start-ups for a select number of activities including technology, research and development and software houses. An Innovation License is not appropriate for start-ups who wish to conduct regulated financial activities for which a license from the Dubai Financial Services Authority is required.

 

Applicants will need to ensure compliance with all the laws of the DIFC as applicable to any other entity established in the DIFC.

 

The licensing fee for an Innovation License has been significantly subsidized to USD 1,500 per annum. As per the DIFC’s current policy, this subsidy in the licensing fee is available for the first four years and the standard licensing fee of USD 12,000 per annum shall apply thereafter.

 

A start-up will have the flexibility to lease an independent office or a co-working space/flexi desk. The number of visas which can be sponsored by the start-up will depend on the type and size of facility leased.■

 

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Afridi & Angell’s corporate department works with many DIFC companies and has extensive experience in advising such companies. Should you have any questions with respect to the innovation licence or more generally on DIFC companies, please contact one of the authors, Danielle Lobo (partner) or Saurbh Kothari (senior associate) or your usual Afridi & Angell contact.