Setting up an investment fund in DIFC

21 August 2024 - Olivia Baikova

The Dubai International Financial Centre (DIFC), centrally located in Dubai, is the leading financial hub in the Middle East, providing investors and businesses with access to the United Arab Emirates’ (UAE) vibrant and opportunistic market. Setting up investment funds in Dubai offers a range of benefits to investors and fund managers.

Why set up a fund in DIFC?

1. Robust Legal and Regulatory Framework

Independent Regulator: The Dubai Financial Services Authority (DFSA) provides a strong regulatory framework, ensuring high standards of investor protection and fund management.

100% Foreign Ownership: Investors can fully own their business in the DIFC without needing a local partner.

Cross-Border Activities: The legal framework supports cross-border financial activities, making it easier to manage international investments.

Common Law System: The DIFC operates under an English-speaking common law system, which is distinct from the UAE's legal system, providing additional legal certainty and comfort for international investors.

2. Attractive Tax Environment

Tax Exemptions: There is a 50-year guarantee of zero taxes on profits, capital, or assets for funds established in the DIFC, as well as zero tax on employee income.

Double Taxation Avoidance Treaties: The UAE’s extensive network of double taxation treaties allows fund managers to operate efficiently within the GCC and broader MENASA regions.

3. High Counterparty Confidence

Reputable Regulatory Authority: The DFSA is internationally recognised, offering investors a high level of confidence in the regulatory oversight.

Judicial Independence: The DIFC courts operate independently, ensuring impartial dispute resolution, which is particularly appealing to foreign investors.

4. Diverse Financial Ecosystem

Concentration of Financial Institutions: The DIFC is home to a high concentration of international firms, wealth management entities, and professional service providers, creating a rich ecosystem for fund managers.

Leading Regional Financial Hub: The DIFC is one of the largest fund domiciles in the region, with a growing number of international funds choosing to operate from here.

5. Strategic Geographic Location

Regional Access: Located at the crossroads of Europe, Asia, and Africa, the DIFC provides strategic access to the emerging markets of the Middle East, Africa, and South Asia (MEASA).

Proximity to Assets: Fund managers can maintain offices close to the assets they manage, which is advantageous for effective management and oversight.

6. A Variety of Fund Structures

There are a range of fund structures available within the DIFC, including:

Public Funds: Suitable for retail investors with no minimum subscription limit.

Exempt Funds: requiring a subscription upwards of USD 50,000, these funds are targeted towards professional clients,

Qualified Investor Funds: With a minimum subscription of USD 500,000, these funds are tailored towards high-net-worth individuals and institutions.

Other Funds: Specialised funds such as Islamic funds, hedge funds, private equity funds, venture capital funds, and property funds are also supported, each with specific regulatory requirements and benefits.

7. Target Market Access

GCC and MENASA Region: DIFC-based funds can effectively target the growing investment opportunities in the GCC and MENASA regions, leveraging Dubai’s strategic position as a financial hub.

In summary, when establishing investment funds, Dubai offers significant benefits in terms of regulatory oversight, tax efficiency, legal certainty, and access to emerging markets, making it an attractive destination for both fund managers and investors.

What are the types, features and requirements of Investment Funds in DIFC?

There are a number of DIFC Investment Fund Types, including:

Public Funds: Subject to more stringent regulations and accessible to Retail Clients as defined by the DIFC.

Key features of Public Funds in the DIFC include:

No minimum subscription requirement.
Units are publicly available.
Limitless number of unit-holders.
Mandatory compliance to IOSCO (International Organization of Securities Commissions) principles.

Exempt Funds: Available exclusively to Professional Clients, as defined by the DIFC.

Key characteristics include:

Subscription upwards of USD 50,000.
Limited to 100 or fewer unit-holders.
Only offered through a Private Placement.

Qualified Investor Funds: Restricted to Professional Clients as defined by the DIFC.

Important features include:

Subscription upwards of USD 500,000.
Limited to 50 or fewer unit-holders.
Only offered through a Private Placement.

Islamic Funds: With a Fund Manager authorised by the DFSA to conduct Islamic Financial Business.

Requirements include:

A Sharia Supervisory Board to oversee.
Implementing Sharia-compliant systems and controls.
Maintaining Islamic business policies and procedure manuals.
Approvals from the Sharia Supervisory Board for relevant documents.

Hedge Funds: Pool capital from investors to invest in a portfolio of assets, often utilising complex strategies and risk management techniques.

The DFSA requires Fund Managers of DIFC Hedge Funds to ensure effective risk management by:

Adequately segregating certain duties (e.g., separating the investment function from the fund valuation processes).
Adhering to the DFSA Hedge Fund Code of Practice guidelines.

DIFC Private Equity Funds: Invest in the equity and debt of private companies, focusing on growth potential, are closed-ended and available only to Professional Investors, and can be structured as either an Exempt or Qualified Investor Fund.

DIFC Venture Capital Funds: Similar to Private Equity Funds, these focus on startups and SMEs with growth potential. Operating in the early stages of a company’s lifecycle and typically involving smaller investments with higher risks, these funds are also closed-ended and restricted to Professional Investors, and structured as either Exempt or Qualified Investor Funds.

DIFC Property Funds: Primarily invest in real estate-related assets and are closed-ended. Public Property Funds in the DIFC face certain restrictions, including:

Investments limited to property or property-related assets.
A requirement to get listed within 6 months.
An 80% limitation on borrowing relative to the Net Asset Value (NAV).

How Can Sovereign PPG Help?

Establishing investment funds in the UAE, with regulatory requirements and processes, can be complex to manage. Therefore, the expertise of a professional corporate services provider is invaluable. Sovereign PPG has decades of experience assisting businesses and investors to find the perfect solution and advise on best practices.

If you need assistance with this or with any other related company setup, restructuring, local partner or PRO support matter in Abu Dhabi, Dubai, the wider UAE, Saudi Arabia, Bahrain, Oman or Qatar, then please do get in touch with us on +971 (0)4 456 1761 for Dubai or email us at SovPPG@SovereignGroup.com or complete the contact form below and we will be delighted to assist you.