The Federal Government of the United Arab Emirates recently issued Federal Decree No. 15 of 2013 establishing a new financial free zone which is expected to be called the “Abu Dhabi World Financial Market.”1 The Decree was issued pursuant to a 2004 federal law which allows financial free zones to be formed by federal decree.
According to Cabinet Resolution No. 4 of 2013, the Abu Dhabi World Financial Market will be located on Al Maryah Island (previously called Sowwah Island), off the coast of Abu Dhabi city, which is the home of Sowwah Square and the new Central Business District. Sowwah Square is already home to numerous international and local companies as well as a Rosewood Hotel, and it is also the intended future location of the Abu Dhabi Securities Exchange. According to a May 1 statement from the Abu Dhabi Executive Council, the new free zone will have a register of companies, a new regulator called the Financial Services Regulations Bureau, and its own court system. This law also makes the Abu Dhabi World Financial Market tax-free for 50 years and expressly permits full foreign ownership of companies.
This Update looks at the legal framework in which the Abu Dhabi World Financial Market would be expected to operate by highlighting (for illustrative purposes) certain relevant features of the Dubai International Financial Centre (DIFC), the well-established and only other financial free zone in the UAE. We have also highlighted a few issues relating to the companies already operating on Al Maryah Island that the Abu Dhabi authorities may have to consider.
While there have been several significant developments relating to the free zone in recent days, there are still a number of issues that the Abu Dhabi authorities will need to address in the months ahead. Baker Botts will continue to monitor developments relating to the free zone and issue additional Updates as further legislation is issued or details otherwise emerge.
A "financial" free zone
In general, the principal advantage of a UAE free zone is that entities formed in free zones are exempt from the application of the UAE Companies Law (Federal Law No. 8 of 1984). This means that foreign entities do not have to comply with the 51% - 49% rule regarding local/foreign ownership contained in the Companies Law, and may therefore establish wholly-owned subsidiaries in a free zone with no requirement for a local sponsor or agent. This also means that entities in a free zone may be incorporated in the free zone itself independently from the otherwise applicable federal and local licensing requirements.
A financial free zone is different from the other types of free zones in the UAE. Unlike other free zone entities, those formed in a financial free zone are also exempt from the federal civil and commercial laws of the UAE.2 In the DIFC, these laws are generally replaced by the DIFC’s own laws, which include a law of contract as well as other legislation applicable only in the DIFC. We expect that the Abu Dhabi World Financial Market will eventually adopt its own legislation regarding similar matters and it will be interesting to see if such legislation is as broad as the legislation applicable in the DIFC, which offers an English common law regime supported by specific laws having application only within the DIFC.
Another important feature of the DIFC is that financial institutions operating in that zone are primarily subject to regulation by a separate regulatory body, the Dubai Financial Services Authority (DFSA), and so long as they restrict their activities to the financial free zone, not by the UAE Central Bank or the Emirates Securities & Commodities Authority, which regulate banks and other financial institutions operating “onshore” in the UAE. Similarly, the Executive Council has announced that the Abu Dhabi World Financial Market will establish a Financial Services Regulations Bureau which presumably will regulate banks and other financial institutions. The new free zone will also have its own court system that includes both a court of first instance and a court of appeal. The Abu Dhabi authorities have not indicated what law would be applied by such courts.
If the Abu Dhabi World Financial Market is intended to operate as a fully independent financial free zone that competes with the rival emerging business centers throughout the Gulf, then we would expect the new free zone authority to adopt laws and regulations modeled upon the highest international standards and for the new regulatory bodies to operate according to best international practices. The failure to do so could place the Abu Dhabi World Financial Market at a competitive disadvantage in the region.
Existing licensees on Al Maryah Island
Numerous companies already operate on Al Maryah Island and have entered into long-term leases with Mubadala Development Company, the owner of the land on Al Maryah Island and the developer of Sowwah Square. These companies are presently operating pursuant to onshore licenses issued by the local relevant Abu Dhabi Government authorities. This onshore licensing allows these companies to conduct business anywhere within the Emirate of Abu Dhabi.
With the island now being given free zone status, these companies are now operating in a free zone but with onshore licenses. This situation may not continue, however, because of certain rules that are generally applicable to free zones in the UAE. In general, only entities licensed by a free zone authority may have premises in, and operate from, that particular free zone. Further, a free zone entity may not conduct business outside the geographical location of the free zone.
If the companies currently operating on Al Maryah Island wish to remain there, we would expect that they will be required to obtain free zone licensing. If a company wishes to do business only onshore in Abu Dhabi and not in the free zone, then such a company would normally be required to relocate outside of the free zone. If a company wishes to conduct business in both the free zone and onshore in Abu Dhabi, then the company would normally be expected to obtain both a free zone license and an onshore license. This potential dual-licensing requirement could increase the costs of doing business in Abu Dhabi for those companies. As these licensing issues raise concerns for the current and future tenants of Sowwah Square, we anticipate that the Abu Dhabi Government will address these matters in the months ahead.
Real estate and Al Maryah Island as an investment zone
Interestingly, Al Maryah Island already has been granted “investment zone” status by a decision of the Abu Dhabi Executive Council in 2009. As such, like the DIFC, Al Maryah Island is now both an “investment zone” and a “financial free zone.” The main significance of investment zone status is that foreign entities in an investment zone are generally allowed to have long term, in rem rights in real property. This is attractive to international real estate companies looking to undertake projects in the investment zone. With the additional free zone status, these international real estate companies may now form wholly-owned subsidiaries to carry out these projects. To date, real estate projects on Al Maryah Island have been undertaken in the form of joint ventures between the foreign entity and Mubadala, with Mubadala being the majority owner.3 It remains to be seen whether, with the free zone status, foreign entities will be permitted to carry out wholly-owned real estate projects on the island, especially if the new free zone, like the DIFC, enacts its own land registry and landlord-tenant legislation.
A new Abu Dhabi court system
It will be interesting to see how closely the new court system in the Abu Dhabi World Financial Market mirrors the existing DIFC court system. If the new courts follow a structure similar to the DIFC courts, then companies can expect some or all of the following features:
- Proceedings in the English language
- Common law framework
- Binding judicial precedents
- Rules of procedure mainly drawn from England & Wales and adapted to best international standards
- Internationally recognized judges
- Professional code of conduct for lawyers practicing before the courts
- Regulations governing the registration of lawyers before the courts
If parties can consent to have their disputes adjudicated by the Abu Dhabi World Financial Market courts, irrespective of whether or not they have any connection to the Abu Dhabi World Financial Market, then this will give them greater freedom of choice in determining the forum for resolving their disputes, and perhaps encourage foreign partners to take on greater risks with regard to their commercial arrangements in Abu Dhabi.
The prominent place that the Cleveland Clinic - Abu Dhabi (CCAD) occupies on Al Maryah Island raises potential regulatory issues. It is an open question whether the hospital will be subject to the regulation of the current local and federal government health authorities, or whether a new healthcare regulator will be established in the free zone. The May 1 statement of the Executive Council that describes the activities of the free zone does not list healthcare as one of the licensed activities in the free zone. However, future legislation concerning the Abu Dhabi World Financial Market could clarify the regulatory regime applicable to CCAD.
The road ahead
The establishment of the Abu Dhabi World Financial Market is beneficial to the UAE because the development of capital markets and financial institutions is of great importance to the broader goals of economic development and diversification of its economy. Further, the establishment of a new, specialized court system in Abu Dhabi will be welcome by foreign companies, particularly if the courts are open to parties outside of the free zone (as is the case with the DIFC). Nevertheless, the Abu Dhabi World Financial Market still has its work cut out for it as the zone will need to enact state-of-the-art legislation and a regulatory framework, establish a new court system, and address the concerns of the current companies operating on Al Maryah Island. How well the Abu Dhabi authorities tackle these challenges will determine whether the Abu Dhabi Financial Market will able to attract the right types of entities to the zone and, ultimately, whether it will be able to compete with the other financial centers in the region, such as those in Doha, Riyadh, and neighboring Dubai.