While it is known to many that the UAE has become a major hotspot for expansion or commencement of business operations due to its ideal location, strategic infrastructure and business-friendly policies, the global prominence and popularity of investment funds in the UAE should also be at the center of discussion. UAE has become a popular jurisdiction for the establishment of investment funds due to a variety of reasons which include readily available world-class infrastructure, stable political and economic environment, business-friendly governmental policies, additional incentives for foreign investors, tax incentives and a favorable corridor for the access of capital at global level.
Why invest in the UAE?
As per the data made available by the Ministry of Investment, UAE, the administration of the UAE believes in prioritizing long-term national goals by building a safe, secure and sustainable economy. This commitment has helped the UAE to maintain a GDP over the past decade at an average of 7%. This vision statement of the Ministry of Investment reflects in the business-friendly governmental policies which helped the UAE to secure the top spot in the Gulf region and 16th spot globally in terms of the ease of doing business as per the ranking issued by the World Bank.
This blog is a part of our General Corporate and Commercial Services.
Why establish an investment fund in the UAE?
The UAE is one of the most preferred options for fund managers and private equity firms because of the following major reasons:
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- No foreign exchange restrictions – the UAE promotes and encourages foreign investment within the region and to promote this vision, foreigners are allowed to freely repatriate the profits and capital out of the UAE.
- Foreign ownership laws – With effect from 2020, the Federal Laws of the UAE allow 100% foreign ownership of certain business structures.
- Impressive federal budget – Federal budget of the UAE for the period of 2022-2026 is pegged at AED 290 Billion, which is the highest in the history of the UAE.
- Stable currency – The federal government of the UAE has been able to constantly keep the AED currency stable against the international currencies. The AED currency is constantly pegged against the US currency at a constant exchange rate of 1:3.67. This stability instills great confidence among the foreign retail and institutional investors.
- Free Zone Areas – the UAE managed to attract foreign investment into different emirates by the development of various free zone areas. It is worth noting that each free zone area has been set up with an aim to grow a specific sector or industry within the UAE. For instance, the Dubai International Finance Centre (DIFC) was established with an aim to boost different financial services within the UAE.
Importance of understanding legal aspects of incorporation of investment funds in the UAE
Understanding the legal aspects of incorporating an investment fund within the UAE is important for legal teams and business teams alike because of the following main reasons:
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- Ensuring compliance: Being aware of the applicable laws, compliances and regulations laid down by the Securities and Commodities Authority (“SCA”), DIFC, ADGM etc. (as may be applicable) helps the businesses to operate and administer the fund in a legally compliant manner and avoid any fines and penalties which may be levied by the regulatory authorities.
- Greater investor confidence and trust: Compliance with legal requirements in letter and in spirit helps in gaining the trust of the investors. Being aware of the legal aspects of the fund establishment and administration helps the fund managers to create a fair and secure investment environment as the investors feel safe about adherence to adequate safety standards.
- Better risk management strategies: Legal aspects also define the scope of liability for the fund managers, investors, and other stakeholders involved. A deep understanding of these regulations helps in designing proper risk management strategies and knowing the legal limits of personal and organizational liability in case of legal disputes or financial losses.
Understanding investment funds in the UAE
What is a fund? What is its purpose?
An investment fund is an investment vehicle incorporated in the form of a company, or a trust and its main purpose is to invest a certain sum of money in other body corporates in lieu of shareholding in such companies. Depending upon the kind of body corporates a fund invests in, the funds can be categorized into different kinds of funds. For instance, a fund which invests in early-stage startup companies are known as venture capital funds.
Overview of the fund structures in the UAE
A fund may be incorporated in the mainland of any of the emirates such as mainland Dubai or may be incorporated in the designated free zone areas located in different emirates of the UAE. For instance, Dubai International Financial Centre (DIFC) situated in Dubai and Abu Dhabi Global Market (ADGM) are two favorite free zones for the establishment of investment funds in freezone areas of the UAE.
The regulations under which a particular fund is incorporated and governed depend on the jurisdiction within which such fund is incorporated in the UAE. For instance, if a fund has to be incorporated in the DIFC, the regulations which exclusively apply within the DIFC shall be applied. Similarly, if a fund has to be established within the mainland UAE, the regulations as laid down by the Securities and Commodity Authorities (“SCA”) in relation to the investment funds shall apply.
Types of Investment Funds in the UAE
While each jurisdiction (such as ADGM, DIFC and mainland UAE) in the UAE offer different kinds of specialist funds with each kind of fund having its own advantages and features, the main kinds of investment funds remain the same regardless of the jurisdiction. A few major categories of funds are briefly described below:
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- Domestic Fund: Domestic funds are the funds which are domiciled within a particular jurisdiction within the UAE. A domestic fund can either be a public fund, an exempt fund or a qualified investor fund (also known as private fund).
- Foreign Fund: A fund which is not a domestic fund is a foreign fund.
- Public Fund: A public fund is a fund which offers some or all of its units to the investors by way of public offer.
- Exempt Fund: A fund is an exempt fund (a) if units are offered by such fund through private placement, (b) all its unitholders are the persons who meet the criteria to be classified as professional clients, and (c) the initial subscription to be paid by a person to become a unitholder is not less than US$ 50,000 (United States Dollars Fifty Thousand) and such fund does not qualify to be a qualified investor fund.
- Qualified investor fund: A Fund is a qualified investor fund if it meets the criteria (a) and (b) of the exempt fund as described above and the initial subscription to be paid by a person to become a unitholder is not less than US$ 500,000 (United States Dollars Zero point Five Million).
- Venture capital fund: A venture capital fund is either an exempt fund or a qualified investor fund which invests only in the securities of the companies which are at an early stage of development and that are not listed or admitted to trading on an exchange directly or indirectly.
