When the Dubai International Financial Centre (DIFC) was established in 2004, the intention was to create an international financial centre alongside New York, London and Hong Kong to serve as a gateway for international financial institutions looking to operate in the Middle East. From its inception the DIFC focused on becoming a leading onshore centre with international standards of regulation and has been careful to avoid comparisons with the major offshore jurisdictions in the Cayman Islands and the British Virgin Islands (BVI), despite the zero-tax rate.
Sukuks and securitisationsOne of the successes of the DIFC has been the development of a thriving capital market. Assisted by the establishment of the Dubai International Financial Exchange (DIFX) and the congregation of international law firms and service providers in Dubai, the DIFC has become central to the region’s capital markets. Most major transactions, whether conventional bonds or sharia-compliant instruments (sukuk, for instance), are now structured, produced and listed on the DIFC, including the first securitisations in the region.
To date, sukuk and securitisation transactions have generally utilised traditional offshore companies, based either in Cayman or Jersey. The DIFC, with its reluctance to be seen as an offshore jurisdiction, has been careful not to allow the use of traditional offshore companies, which have no employees or presence. However, given its popularity for capital markets transactions, and the move to become an all-purpose, self-sufficient financial centre, the DIFC recently issued draft regulations on ‘exempt companies’.
The ‘real’ dealGiven the zero-tax rate in the DIFC, there has always been a temptation to allow some form of traditional offshore-style companies. However, the DIFC has been keen to preserve its onshore status by permitting only ‘real’ companies with ‘real’ operations, but this has prevented the structured finance companies typically used in sukuks, securitisations and asset finance transactions from being domiciled in the DIFC.
Of the 12 sukuk issuances recently listed on the DIFX, only one was domiciled in the DIFC and eight were incorporated in Cayman. The dilemma for the DIFC has been to encourage structured finance vehicles, which advance its reputation as a financial centre, without opening the floodgates for thousands of anonymous holding companies.
In February 2008 the DIFC issued the draft Exempt Companies Regulations for consultation, aimed at promoting securitisation and structured finance transactions. The regulations are expected to be implemented soon.
Prior to the proposal DIFC-incorporated companies were not suitable for structured finance transactions, as the company was required to have a real presence, with office space and personnel, regular board and shareholder meetings and audited accounts. More importantly, a typical DIFC company operating as a sukuk issuer or in a securitisation might find itself conducting regulated activities, such as trust business or collective investment business.
The incorporation of exempt companies will allow capital market practitioners to structure and domicile their transactions in the DIFC and the exempt companies will be offered various flexibilities. These include no requirement for physical presence in the DIFC, just a corporate services provider and a DIFC-registered office address. Shares of the exempt company can be held by a trustee on trust for charity – the ‘orphan company’. Share trustees for orphan companies can be licensed trust companies or appropriately licensed entities in other recognised jurisdictions.
Elsewhere, directors can be supplied by a corporate service provider and need not be in the DIFC; corporate filings with the registrar of companies may be electronic or faxed, originals need only follow within a month; and exempt companies are not subject to regulation for financial services.
Speed and efficiencyAppreciating the need for speed and efficiency when establishing structured finance companies, the regulations propose a streamlined incorporation process whereby a single application setting out the details of the parties involved and description of activities is submitted to the registrar of companies. The draft regulations anticipate that the activities of an exempted company will be limited to finance transactions, including sale or synthetic securitisations, bond issuance and sharia-compliant structured products and related activities. Having established itself as the regional financial centre, the DIFC is continuing its development with the introduction of exempt companies for structured finance transactions. While it is unlikely that the DIFC will go so far as to offer the type of holding companies familiar in offshore jurisdictions, exempt companies present an attractive onshore alternative while offering many of the same benefits, such as tax-free status, efficient formation and economical running costs, and should prove popular for regional sukuk and securitisation deals.
However, as the market becomes familiar with exempt companies and the legal framework in the DIFC develops, they should also prove popular for regional asset finance structures such as aircraft financings – transactions that have traditionally utilised offshore orphan companies and which are popular in the Middle East.
Tahir Jawed is managing partner at Maples and Calder Dubai