Editor: Please tell our readers about the Dubai International Financial Centre (DIFC), including its mission and services to U.S. and multinational corporations.
Ali: The DIFC is designed to afford multinational banks, financial institutions and investment companies, law firms, accounting firms and other asset managers and investment advisors the opportunity to set up a base of operations in the Middle East where they can own one hundred percent of their branch offices or subsidiary companies. While the DIFC is not portrayed as a free-zone area, and is distinguished from other free-zone areas in the UAE, it is tax free in the sense that the tax rate is set at zero. Firms are not taxed on the revenues that they generate, but they do pay fixed fees for their licenses and other services that they apply for. DIFC has developed a regulatory body known as the Dubai Financial Services Authority (DFSA). The DIFC is designed to allow banks, financial institutions, law firms, accounting firms, insurance companies and the like to operate within its campus. It has also developed a set of courts and an arbitration center. Not only are transactions done in the Center governed by the laws of the Center, but its jurisdiction has been expanded so that DIFC laws and courts can be used by entities based outside the Center. Thus, the Center has become a capital markets and financial hub for the Middle East allowing the resident firms to cover the entire region and beyond. Originally, it was thought that firms located within the Center or transacting business there would simply cover the GCC. Now companies based in the DIFC cover the Middle East, North Africa and South Asia.
Editor: What does the judicial authority in the DIFC offer in terms of dispute resolution? Are decisions recognized by courts throughout the world?
Ali: The court system in the DIFC is very recent –six to eight years old – so we haven’t had the opportunity to see whether it will be recognized on a worldwide basis. But, having said that, the UAE is a signatory to various international treaties, and a judgment issued by the DIFC court or the DIFC arbitration center would be afforded the same recognition as a judgment of the UAE courts in general, placing it on an equal footing with the courts of Dubai, Abu Dhabi, or any of the other Emirates. It has the added advantage that the language used in the courts and the arbitration center is English and the laws are modeled after English law, providing a common law structure. I would say that they would be more easily recognizable and understood than judgments rendered by regular Dubai courts or Abu Dhabi courts.
Editor: Is the DIFC a place where financing would be originated and capital would be raised to underwrite projects not only in Dubai but throughout the Middle East?
Ali: The DIFC is the largest operations center for international banks in the Middle East, whether by design or de facto, because the Center has developed to such a high level of excellence. Every international bank that does any global finance has its largest office in the Middle East at the DIFC. While not all capital market or financial transactions in the Middle East are arranged and completed at the Center, the Center is likely to be involved in almost all transactions in the Middle East in some fashion because the majority of the banks, investment banks, private equity firms, real estate firms, accounting firms and law firms have their senior middle executives or partners based at their offices at the DIFC. . Naturally, these banks and other institutions have operations elsewhere in the Middle East, but it would be strange to see a transaction that did not somehow involve the DIFC. If it’s not the bank, it’s the law firm, the accounting firm, the sponsor arranging the equity, or the transaction itself, so the Center has become a focal point. I would say that it would be hard to find a serious transaction taking place in the Middle East without some connection to the DIFC.
Editor: I would assume the turmoil in the Middle East would be followed by a period of reconstruction, when financing would be needed. Are you seeing any investment opportunities to help countries like Egypt rebuild their economies?
Ali: It’s too early to say whether the various new markets that have sprung up as a result of the Arab Spring , such as Tunis, Egypt, and Libya, would afford immediate investment opportunities to foreign investors. There is no doubt in my mind that in the medium to long term, the investment and development opportunities in these markets will be immense. In fact, - a lot of our clients are watching and mining opportunities in these jurisdictions , but we haven’t seen projects coming to fruition yet, particularly in places where the wounds are still very fresh – Libya included. There’s a lot of talk by the private sector, but the action is being led by the various governments who have played a role in the revolutions in these countries. The opportunities are there, but the political and security situation in these jurisdictions needs to settle first for us to see a solid pipeline of projects tendered.
Editor: What are some of the tax advantages for multinational companies that use the DIFC as headquarters for their operations?
Ali: The DIFC offers a tax-favorable environment for conducting business in the Middle East, but there’s no benefit for conducting your business in the DIFC if your parent company is based in a tax jurisdiction like the U.S . There are no double taxation treaties between the UAE or any of the Gulf countries and the U.S.
I am not aware of any multinational that is actually headquartering its operations in the DIFC. There might be a subsidiary that is handling Middle Eastern work, but I don’t think people are coming here for the purpose of tax avoidance. There is a tax advantage in that the DIFC has a zero percent tax rate, but companies will still have to pay a tax when they repatriate funds to their home countries.
Editor: We understand that financial services and other licensing processes can be very complex. Please discuss how the DIFC works with the Dubai Financial Services Authority (DFSA).
Ali: Every regulatory body has its own complexities and there is a learning curve to understanding how the DFSA and the DIFC operate. The one good thing that I credit them with is that they listen and are constantly in review-mode of their regulations. This is true of the governor’s office, the CEO’s office and the DFSA. There is an open door policy where one can speak to the appropriate authority about a regulation that is impacting one’s business. They’re good about refining the process and working with firms. I’m not going to deny that there is complexity and there is regulation, but the Center has been very clear that this is not an unregulated environment in which you pay your annual dues and do whatever you want. There is regulation, but they’ve been very good about streamlining it.
Editor: Is there any analogy between the controls and disclosure requirements of the DFSA and the SEC in the United States?
Ali: You would find that there is an analogy, although it probably follows more closely the English model, the Financial Services Authority (FSA). The laws and regulations they’ve adopted closely follow English rather than U.S. regulation. You’ll find that the Know Your Customer (KYC) requirements and anti-money-laundering requirements impose a higher standard than in the U.S. -closer to UK regulations. Certainly, as a law firm we are subject to a higher standard in the DIFC than we are in the U.S. in terms of knowing our clients before we undertake any work for them. We need to know the beneficial owners of a company and who has ultimate control, from what person or source do they derive their funds, and what is their reputation. The DIFC is very, very stringent about knowledge of these relationships.
Editor: What is the DIFC’s interaction with U.S. authorities that administer and enforce economic sanctions in the Middle East?
Ali: As a firm that is registered, licensed and regulated by the DIFC we get circulars on a regular basis that announce the introduction of sanctions such as those issued on Libya during the Libyan crisis. They fully explain the UN’s position to the companies in the DIFC as to what would be required of them in terms of their relations with current clients or customers who might fall within the newly issued sanctions. We as a law firm obviously have a very active practice in this field and have counseled numerous clients in the Middle East who have received these circulars, whether they are in the DIFC or are regulated by the central bank. We’ve actually had a flurry of activity as a result of sanctions, whether those imposed on Libya, Syria or Iran.
Editor: How does the DIFC partner with law firms and other legal and professional service providers, both in Dubai and internationally?
Ali: The DIFC has an open dialogue with the legal profession. They actually schedule events on a regular basis and send consultation papers on various laws before they are issued. The center fosters the idea that it wants to be the best in the region and to comply with international regulations including sanctions, but it wants to do it in a very efficient and business-friendly manner.