On October 31, 2019, the Dubai International Financial Centre (“DIFC”) issued, under the DIFC Companies Law (Law No.5 of 2018) (the “Companies Law”), the Prescribed Company Regulations (the “Regulations”). The main objective of the Regulations is to replace, expand and consolidate the former Special Purpose Company Regulations and Intermediate Special Purpose Vehicle regime. The Regulations provide a business-friendly regime allowing the set-up and maintenance in a cost- and time-efficient manner of Prescribed Companies in the DIFC.
This regime – which relaxes some of the requirements normally applicable to the establishment and maintenance of DIFC limited companies (such as the need to maintain a physical office in the DIFC, for example) – is only available to entities that already have a substantive presence in the DIFC (i.e., entities that are incorporated or licensed in the DIFC and already have a physical office presence in the DIFC free zone), or otherwise in conjunction with certain qualifying transactions (e.g., structured finance transaction). As such, this regime will certainly be of interest to DIFC-based funds, private equity houses, family offices and many other market participants willing to set-up ring-fenced structures for their downstream investments from the DIFC, in a cost- and time- efficient manner (which therefore presents a compelling alternative to offshore structures which would otherwise be typically used by such market participants). Finally, by virtue of being incorporated in the DIFC, a Prescribed Company offers a number of key benefits enjoyed by other types of DIFC entities (such a no corporate tax, 100% foreign ownership, access to the DIFC infrastructure, including its robust legal and judicial system), as further detailed below.
What is a Prescribed Company and What is it for?
A Prescribed Company is a private company limited by shares, which is exempt from certain of the onerous requirements associated with setting up a presence in the DIFC.
An applicant wishing to incorporate or continue a Prescribed Company in the DIFC must satisfy the Registrar that:
- The Prescribed Company will be Controlled by one (1) or more Qualifying Applicants; or
- The proposed Prescribed Company is to be established or continued in the DIFC for a Qualifying Purpose.
Qualifying Applicants are essentially any DIFC registered entity including any of the following:
- An Authorised Firm;
- A Fund;
- A Family Office;
- A Fintech Entity;
- A Foundation;
- A Government Entity;
- A Holding Company;
- A Private Trust Company;
- A Proprietary Investment Company; or
- A person wholly owned by one (1) or more of the foregoing Qualifying Applicants, and which satisfies the Registrar that it or they will Control the Prescribed Company.
Qualifying Purposes are any of the following:
- An Aviation Structure;
- A Crowdfunding Structure;
- A Family Holding Structure; or
- A Structured Financing.
Control in relation to a Prescribed Company, the power of a person to secure:
- By means of the holding of shares or the possession of voting power, in either case directly or indirectly; or
- As a result of any powers conferred by the Articles of Association or other document regulating the Prescribed Company or any other body corporate, that the affairs of the Prescribed Company are conducted in accordance with such person’s wishes.
What Are The Advantages of a Prescribed Company?
No Separate Registered Office
The Regulations provide flexibility regarding the DIFC’s registered office requirement with a Prescribed Company’s registered office being either:
- The registered office in the DIFC of its Qualifying Applicant;
- The registered office in the DIFC of the registered person establishing the Prescribed Company for a Qualifying Purpose; or
- The registered office of a corporate service provider appointed for this purpose.
Fees for prescribed companies have been further reduced in the new regime and the competitive pricing now offered is as follows:
- Application for incorporation of a Prescribed Company: US$100
- Application for grant or renewal of a Licence: US$1,000
- Prescribed Companies are exempt from any requirement to file their accounts with the Registrar or have them audited;
- Corporate service providers have express power to complete the administrative tasks including the initial incorporation checks and annual confirmation requirements.
By virtue of being incorporated in the DIFC, a Prescribed Company offers a number of key benefits enjoyed by other types of DIFC entities, including:
- Tax neutrality. There are no corporate, transfer, withholding, capital gains, inheritance or other taxes under DIFC law, and no stamp duty is payable in the DIFC on the transfer of shares in a DIFC entity.
- No foreign ownership restrictions. Companies incorporated in the DIFC, including Prescribed Companies, are not subject to the foreign ownership restrictions imposed by the UAE Companies Law and can therefore be 100% owned by foreign (i.e., non-UAE) shareholders.
- UAE status. A company that is incorporated in the DIFC and is wholly owned by UAE nationals (or by an entity that is 100% owned by UAE nationals) is treated as a “national company” for onshore purposes within the UAE. It is therefore likely that Prescribed Companies could be used for the structuring of complex transactions involving onshore UAE assets.
- Limited liability of shareholders. The liability of shareholders in a DIFC company is generally limited to the amount of their commitment to the company’s share capital. As such, Prescribed Companies should be an effective tool to allow market participants to ring-fence their exposure to specific investments in a cost-efficient manner.
- Application of DIFC Law. A Prescribed Company benefits from being incorporated within the DIFC’s robust regulatory and legal system, where English is the primary language. DIFC corporate law is largely based on English common law principles and the DIFC Courts operate a system of binding precedent based on common law. Investors using Prescribed Companies will also able to benefit from the DIFC’s advanced regime for the registration, perfection and enforcement of security interests.
Is Economic Substance a Concern?
The UAE Economic Substance Regulations (Ministerial Resolution No. 31 of 2019) apply to all UAE onshore and free zone companies that carry on a “relevant activity.” Relevant activities include banking, insurance, fund management, shipping, office headquarters, IP and distribution. While it is likely that in most cases a Prescribed Company used to hold downstream investments would itself carry on a “relevant activity,” companies should be cautious as seemingly simple structuring outcomes such as warehousing IP in a Prescribed Company (even if for a short period of time during a restructuring) could trigger the need to satisfy the economic substance requirements.
With increasing competition from other free zones in the UAE, this expanded and streamlined regime is a positive change designed to meet the need of market participants looking to structure their downstream investments from the DIFC. Furthermore, the simple incorporation process (which can largely be managed by corporate service providers) and competitive fees combined with the integrity of the DIFC legal and regulatory regime sets to reinforce the attractiveness of the DIFC as a place for business.