Tag: DIFC – Dubai International Financial Centre

Ultimate Beneficial Ownership Regulations (DIFC)

The DIFC Authority has issued the Ultimate Beneficial Ownership (UBO) Regulations, which took effect on 12 November 2018 (the Regulations).

 

The Regulations require entities currently registered with, or to be registered with, the DIFC Authority to keep and maintain a UBO Register and (if applicable) a Register of Nominee Directors, setting out the details of the UBO and Nominee Directors respectively.

 

In this inBrief, we highlight the key items that DIFC entities need to be aware of in creating and maintaining their UBO Register and Register of Nominee Directors and in issuing the associated notifications to the DIFC Registrar of Companies.

 

Who are the Nominee Director and the UBO?

 

For the purposes of the Regulations, a Nominee Director is a director who is obligated to act in accordance with the directions and instructions of another person.

 

An ultimate beneficial owner is a natural person who:

 

– in relation to a DIFC company, owns or controls directly or indirectly:

o 25% of shares, ownership interests or voting rights in the DIFC entity; or

o has the right to appoint or remove the majority of the directors of the DIFC entity.

 

– in relation to a DIFC partnership, exercises significant control over the activities of the partnership;

 

– in relation to a DIFC foundation, exercises significant control over the council of the foundation; and

 

– in relation to a DIFC non-profit incorporated organisation, exercises significant control over the board.

 

If, after applying the foregoing rules, no natural person can be identified as an ultimate beneficial owner of the DIFC entity, anyone who exercises significant control over the DIFC entity (or its governing body) shall be required to be notified as an ultimate beneficial owner of the DIFC entity. If there is no such person, then members of the governing body of the DIFC entity shall be required to be notified as ultimate beneficial owners of the DIFC entity.

 

Obligation of DIFC entities

 

The obligations of the DIFC entities vary slightly depending on when they were registered with the DIFC Authority.

 

– DIFC entities registered prior to 12 November 2018 were required to establish a UBO Register and Register of Nominee Directors, and notify the details of the Nominee Directors and the ultimate beneficial owner to the DIFC Authority through the DIFC portal by 12 February 2019 (the DIFC Authority granted an additional penalty free grace period of 30 days, meaning that the final deadline for compliance was 14 March 2019).

 

– DIFC entities registered after 12 November 2018 were also required to comply with the deadline of 14 March 2019 to establish a UBO Register. For the Register of Nominee Directors, the deadline is 30 days of the later of the registration date of the DIFC entity or the Nominee Director becoming a director of the DIFC entity.

 

– Entities in the process of being registered with the DIFC Authority are required to establish a UBO Register 30 days following the date of registration with the DIFC Authority.

 

The latter two categories of entities need not notify the DIFC Authority of the UBO details, as they are deemed to have provided such details as part of the registration process.

 

Changes to the UBO Register

 

DIFC entities must record any changes to the UBO Register and Register of Nominee Directors, and notify the DIFC Authority of the same through the DIFC Portal, within 30 days of becoming aware of such change.

 

Penalties

 

Failing to keep and maintain the UBO Register and the Register of Nominee Directors will result in a fine of USD 25,000. If the DIFC entity fails to comply with any requirement, or notice issued, under the Regulations, the DIFC Registrar may strike the DIFC entity off the Public Register.

 

Exempt Entities

 

The Regulations set out DIFC entities that are exempt from keeping and maintaining a UBO Register and Register of Nominee Directors. These are DIFC entities that:

 

– have their securities listed or traded on an exchange recognised by the DIFC Authority;

 

– or regulated by the DFSA or any other financial services regulator recognised by the DIFC Authority;

 

– constitute a company, foundation or partnership which the DIFC Authority recognises as being subject to equivalent international standards with adequate transparency of ownership information in its home jurisdiction;

 

– are a non-profit incorporated organisation which does not, as its primary function, engage in raising or disbursing funds for charitable, religious, cultural, educational, social, fraternal or similar purposes;

 

– are wholly owned by a government or governmental agency of the UAE and any other jurisdiction which the DIFC Authority may determine from time to time; or

 

– are established under UAE law to perform governmental functions.

 

DIFC entities that fall under one of the abovementioned categories will be required to request a formal exemption.

 

Partially Exempt DIFC Entities

 

Additionally, the Regulations set out the requirements for a partially exempt DIFC entity, which is a DIFC entity that is at least 25% owned by a corporate person that falls under one of the abovementioned categories (Exempt Owner). Such DIFC entity is subject to the obligations set out in Section 4, however with respect to the Exempt Owner, instead of tracing the ownership details of the Exempt Owner, the details of the Exempt Owner are inserted in the UBO Register instead. ■

Big brother is watching

The DIFC Court has confirmed that businesses in the DIFC can listen in and make use of telephone conversations made by their employees. His Excellency Justice Omar Al Muhairi issued an order to this effect on 31 October in the case of ED&F Man Capital Markets MENA Ltd and RJ O’Brien MENA Capital Ltd (and others). Afridi & Angell are representing ED&F Man Capital Markets MENA Ltd in this matter. Lawyers for the defendants had sought to exclude evidence introduced by ED&F which consisted of transcripts of telephone conversations made by ED&F employees. Defendants’ counsel claimed that such recordings were a breach of the UAE Penal Code, and therefore should be inadmissible in the DIFC Court proceedings. Justice Al Muhairi rejected this argument on two grounds. Firstly, on the basis that the individuals involved in the telephone conversations had provided consent to the recordings, and secondly on the basis that the Dubai Financial Services Authority mandates the recording of communications relating to transactions. ■

DIFC special purpose companies and exempt activities: a special purpose

The special purpose company (SPC) regime in the Dubai International Financial Centre (the DIFC) offers a vehicle that is convenient for use in many types of corporate finance transactions. A DIFC SPC is relatively quick and easy to establish and inexpensive to maintain on an ongoing basis as compared to a DIFC company limited by shares.

 

All SPCs are governed by and subject to the DIFC Special Purpose Company Regulations (the SPCoR).  Importantly, the SPCoR stipulates that an SPC can only be used for an “Exempt Activity”. In summary, the SPCoR requires that an SPC be used only where some form of financing, debt or capital markets transaction is contemplated.

 

Those that seek to use an SPC in their corporate structures must take this limitation into account. The DIFC Registrar of Companies is granted the right to review the status of a DIFC SPC, and to revoke the privileges and exemptions granted to an SPC by the SPCoR, should an SPC undertake any activity which is not an Exempt Activity. Specifically, this means that an SPC should not be used merely as a holding company, where there is no genuine financing element that would qualify as an Exempt Activity under the SPCoR. We are aware that the DIFC authorities have recently stepped up enforcement activity in an effort to ensure that all SPCs are adhering to the restrictions set forth in the SPCoR in letter and spirit.  This approach could affect the viability of using an SPC as a mere holding vehicle in new structures, and could also affect existing structures if the DIFC authorities choose to examine the stated versus actual activities of existing SPCs. ■

The right to be forgotten

Afridi & Angell has recently successfully assisted two individuals in becoming forgotten. Put another way, we were able to convince the Dubai Financial Services Authority (the DFSA) that the names of the individuals should be removed from public documents available on the DFSA website. These included published regulatory actions (in the form of enforceable undertakings) and DFSA media releases.

 

The individuals had been associated with a regulated company in the Dubai International Financial Centre (the DIFC). The company had operated in the DIFC for several years, but in 2008 had the unhappy distinction of becoming the first business in the DIFC to be essentially closed down by the DFSA as a result of various regulatory concerns.

 

Afridi & Angell assisted the company throughout the DFSA investigation and enforcement process. We also assisted in the negotiation of the enforceable undertakings eventually provided by various individuals in late 2008.

 

The precise terms of the undertakings varied amongst the individuals, but included obligations such as the payment of fines to the DFSA, and the need to refrain from undertaking any sort of licensed activity in the DIFC for a period of time.

 

In the years following 2008 the individuals complied with the terms of their undertakings, and following the closure of the business, most left the UAE. Such is the nature of the internet, however, that details of the problems in the business, and of the roles of the individuals, followed them wherever they went, and for years afterwards.

 

The fact that the individuals were still suffering negative consequences in 2017, nearly a decade after the incidents that led to the DFSA’s regulatory concerns, prompted the individuals to seek a solution. The negative consequences included social stigma, such as when one of the individuals attempted to enroll his child in a new school, and found that the application was suspended until he could provide the principal with the details regarding the events in 2008. There were also more significant financial consequences, such as when one of the individuals failed to secure a particular professional position in part due to concerns over the 2008 events.

 

By virtue of being on the DFSA website, the undertakings and media releases were public documents.

 

These ongoing negative consequences were not proportional to the areas of concern that led to the giving of the undertakings in 2008. For this reason, we asked that the DFSA consider removing the undertakings from the DFSA’s website. As an alternative, we asked that the DFSA consider replacing the undertakings with a redacted version in which the individuals’ names were not disclosed.

 

Many countries have legislation aimed at the rehabilitation of offenders. Such legislation typically enables some criminal convictions to be ignored after a rehabilitation period. The intention is to prevent people from being punished indefinitely because of a relatively minor offence in their past. Here in the UAE there is a process by which some convicted criminals can apply to the police for their records to be sealed.

 

In addition to the widespread rehabilitation-of-offenders legislation, the “Right to Erasure” or the “Right to be Forgotten” is a developing legal concept in a number of jurisdictions. The nature of the internet means that information remains readily accessible for far longer than has been the historic norm. It is encouraging to see that the DFSA is willing to take notice of the evolving jurisprudence in this area. ■

Do I need a DIFC will?

The Wills and Probate Registry in the Dubai International Financial Centre (the “Registry”) opened in late April of this year. It is now possible to register a will in Dubai, and to have a high degree of confidence that it will be enforced in accordance with its terms. Prior to the establishment of the Registry, it hadn’t been possible to be so confident that foreign wills would be enforced in the United Arab Emirates. There were concerns that Shari’a law would be applied to the estates of non-Muslims, particularly with respect to real property (land and buildings).

 

In summary therefore, the establishment of the Registry is a welcome initiative, and if you have assets in Dubai then you should almost certainly register a will with the Registry.

 

A few points to note right from the beginning: firstly, only non-Muslims may lodge their wills with the Registry. At the time of registering the will the testator (the person making the will) must confirm that they are not a Muslim, nor have ever been a Muslim. If this confirmation is later proved to be inaccurate then the will becomes void. Secondly, testators must be at least 22 years old. Thirdly, the will can only relate to assets in the Emirate of Dubai. Finally, the value of the Dubai assets must be balanced with the costs of using the Registry. There are a number of fees payable, some reasonably significant for many people. (The cost of registering a will is currently AED 10,000.)

 

Prior to the introduction of the Registry, a multitude of approaches were taken in respect to estate planning by Dubai residents. Many people, of various faiths, made no will at all. For those people who were aware of the applicable inheritance and intestacy rules, this was (and continues to be) a perfectly sensible choice. If your family structure is straightforward, and you understand and are comfortable with how your assets will be distributed where there is no will, then there is no reason to make one.

 

Historically, a variety of solutions were offered to those people who were not sure how their assets would be treated if there was no will, and who wished to create one. Some were told that it was necessary to register a Dubai will with a local notary. Others were told to make a will in their home country, have it translated into Arabic, and then registered locally. Others were told that it was sufficient to sign the will and have it witnessed by a staff member at their home country consulate in Dubai. In short, there was no consensus as to the most appropriate method of creating a will in the UAE, or of ensuring that it would be enforced in accordance with its terms.

 

The DIFC Registry seeks to resolve these concerns. Wills are reviewed by Registry staff prior to being accepted for registration. This review is anticipated to prevent the registration of wills with blatantly unacceptable terms (ie “. . . and finally, I leave the balance of my estate for the funding of international terrorism, and general crimes against the state”). More significantly, the review ensures that the will formalities are properly attended to (that the will is correctly witnessed, and so forth).

 

Once registered, the intention is that the terms of the will can be given effect to by the DIFC Court if necessary. Decisions of the DIFC Court must, as a matter of UAE law, be enforced by the Dubai Courts. It is then anticipated that other relevant Dubai governmental entities (such as the Economic Department in respect of assets such as company shares, or the Lands Department in respect of real property) would automatically abide by orders issued by the Dubai Courts (or even by the DIFC Court directly).

 

This process appears robust, but a small note of caution must be sounded. This is a new, and so far untested, system. It remains to be seen whether the relevant government departments will indeed recognize DIFC wills. We anticipate that this point will be resolved relatively soon, as there appears to be a significant number of individuals eager to make use of the Registry. Furthermore, we have no reason to believe that the system will not work as it should. On that basis, we welcome this beneficial addition to the legal landscape of the Emirate of Dubai. ■

 

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Afridi & Angell can assist with the drafting and registration of DIFC wills. Please contact Stuart Walker if you wish to arrange an appointment to discuss any of the issues mentioned in this note.

The DIFC in focus

DIFC Rent Cap

 

A new Dubai Decree on rental increases issued at the end of last year has significant implications for the current practice of landlords in the DIFC. Previously, there was no rent cap law in the DIFC. Now, Decree No. 43 of 2013 on Determining the Increase in the Real Estate Rentals in the Emirate of Dubai also determines the extent to which rents may be increased in the free zones, and expressly refers to its applicability in the DIFC. As a whole, the Decree applies to landlords in all of Dubai.

 

 

The Decree provides a mechanism for calculating the maximum rent increase permitted, if at all, upon renewing a lease. The calculation is determined by reference to the average rental value in the area where the property is located and the percentage to which the rent pre-renewal falls short of that. Article 1 of the Decree sets out the maximum increase in rent allowed depending on the difference between the rental amount and the average rent paid in the area. No rent increase is permitted where the rental amount is up to 10 percent less than the average rental in the same area.

 

 

The Decree also stipulates that the average rent is determined by the RERA rent index for which the Rental Increase Calculator is available online. The Rental Increase Calculator allows a landlord or tenant to enter the current annual rent paid for the type of property in a particular area and calculate the permitted rent increase. The Rental Increase Calculator has just this month been adjusted for rental prices and now also includes properties in the DIFC.

 

 

Further, it should be noted that the Rental Disputes Settlement Centre of the Dubai Land Department will handle all rental disputes arising between landlords and tenants in the Emirate of Dubai (including the free zones). However, this does not apply in respect of rental disputes arising inside free zones that have courts competent to settle rental disputes arising within their boundaries. Therefore, the DIFC Courts would have jurisdiction over any rental dispute in the DIFC. Moreover, in this regard the DIFC Small Claims Tribunal (Resolution of Rental Disputes) Order No.2 of 2014 issued this month directs and expressly provides that the Small Claims Tribunal will hear and determine all rental disputes where the amount of the claim does not exceed AED 500,000.

 

Revised Procedural Rules of the DIFC Courts

 

Following a two-month consultation period, the 2014 edition of the Rules of the DIFC Courts have now been published. The Rules governing the Courts’ procedures have been revised to incorporate several important changes including provision for a cost-free trial for pro bono litigants under Part 38, whereby the Pro Bono Panel may decide, subject to certain criteria, to grant such litigants a trial without the risk of legal costs being awarded against them if they lose, and changes to Part 28 which governs the production of documents.

 

With respect to the revised Part 28, the intention is to bring the provisions more in line with the International Bar Association’s disclosure rules. Importantly, the revised part provides for co-operation between the parties where the volume of documents to be searched is likely to be extensive requiring the parties, where possible, to exchange preliminary production requests in draft form before standard production of documents takes place. Any such exchange should not limit the parties’ rights to submit further requests to produce documents thereafter. Also of significance is that the grounds for excluding documents from production have been extended to include considerations of procedural economy.

 

Memorandum signed between DIFC Courts and Federal Court of Australia

 

Further to the memoranda signed between the DIFC Courts and the UK Commercial Court in January 2013, and the Supreme Court of New South Wales in September 2013, in March this year the DIFC Courts have signed a similar memorandum with the Federal Court of Australia addressing the reciprocal enforcement of money judgments.

 

As with previous such memoranda signed by the DIFC Courts the intention is to assist investors and those interested in doing business from the relevant jurisdiction in the region, and encourage and develop closer trade and investment relations between that jurisdiction and Dubai by increasing confidence and certainty in the legal system.

 

Amendments to the DIFC Arbitration Law

 

DIFC Amendment Law No.6 of 2013 (the Arbitration Amendment Law) enacted in December 2013 amends the DIFC Arbitration Law No. 1 of 2008 and gives the DIFC Courts the power to stay court proceedings in favour of arbitration with a seat outside of the DIFC. The amendment seeks to clarify the law and bring it in line with the New York Convention, to which the UAE is a signatory. The amendment was necessary to effect the obligation under Article II(3) of the New York Covention which requires that a court of a Contracting State, if seized in a matter in respect of which there is a valid arbitration agreement between the parties, shall refer the matter to arbitration.

 

Previously, Article 13(1) of the DIFC Arbitration Law No.1 of 2008 was held in the case of Injazat Capital Limited v Denton Wilde Sapte (2012) only to empower the DIFC Courts to stay arbitration proceedings where an arbitration agreement stipulated the DIFC as its seat. The judgment acknowledged that it “would thwart the promotion of the DIFC as a jurisdiction supportive of arbitration.” The amendment to the law has been welcomed as one that resolves this issue by expressly providing that the DIFC Courts’ power to stay proceedings under Article 13(1) also applies where the seat of arbitration is not the DIFC. ■