The Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) are two of the main jurisdictions to consider when looking at an investment fund structure in the UAE. Both have independent financial regulators, court systems and fund regimes, and both offer a common law environment that is recognized and comfortable to many international investors. But reputations or registration fees are not the only factors to take into account when deciding between them. This will depend on the fund strategy, the profile of the investor, the legal structure, the regulatory environment, the tax treatment and access to the specific financial ecosystem.
Understanding Fund Structures in DIFC and ADGM
A fund structure is a combination of legal instrument, regulatory classification combined with a fund manager. The legal entity of the fund will dictate the way in which the fund is set up, and the regulatory category will determine who is allowed to invest and how much regulation applies. The manager will be responsible for the management of the fund within the limits of authority provided by the appropriate regulatory authority.
The fund types offered by DIFC are similar to those offered by ADGM. Public money can be made available to individual investors and has more stringent regulations. Exempt funds are normally available in the private placement realm and will be governed by a less burdensome regulatory structure. Qualified Investor Funds are for more advanced investors and have larger minimums for investment. In both centres the minimum subscription is USD 50,000 for an Exempt Fund and USD 500,000 for a Qualified Investor Fund.
Both also offer a number of legal mechanisms such as investment companies, limited partnerships and trusts. Some are also capable of holding umbrella funds with segregated sub funds. The fund must have an appropriate manager or manager arrangement, but some external manager arrangements may be acceptable under the framework.
Similarities mean that the investor category is not going to be a crucial deciding factor for most investors between DIFC and ADGM. The key question is whether the legal entity, the regulatory classification and the management structure are suitable for the proposed fund and is investors.
Legal and Regulatory Framework
The Dubai Financial Services Authority (DFSA)[1] regulates the DIFC funds, and the Financial Services Regulatory Authority (FSRA)[2] regulates the ADGM funds. The process of incorporation in either financial centre does not, as such, give a person permission to carry on regulated fund management activities. The manager is responsible for securing necessary permissions for activities he plans to use.
There are also variations in the legal frameworks. English common law is directly applied in ADGM as part of its legal system, with the application of ADGM legislation. DIFC, on the other hand, has its own extensive system of codified laws, derived from the common law tradition. Both systems have a clear legal framework for international transactions and investments. The difference could still be significant for investors and advisers who have a more traditional orientation to one approach.
There are regulations beyond the initial authorisation. Fund managers need to have the proper governance, compliance, qualified staff and continuing reporting systems in place. Due ti several factors such as the evaluation of the Money Laundering Reporting Officer, compliance procedures, office substance and supporting documentation, and senior management. This implies that structuring is a regulatory relationship to be continued and not an unique registration process.
How the Choice Works in Practice
The first thing to be done is to identify the strategy of the fund and the target investors for the fund. Institutional long duration capital managers, such as private equity or private credit managers, may have distinctly different needs when choosing which hedge fund to engage with as a prime broker, adviser, or a bank that can access a focused private wealth network. The jurisdiction thus should come after, and not before, the commercial model.
Dubai is a well established financial hub for DIFC. This can make DIFC attractive to liquid strategies, hedge funds and managers whose investor relationships are centred in Dubai or connected to the wider private wealth market.
ADGM continues to build a robust institutional and private markets ecosystem in Abu Dhabi. Private equity, private credit and infrastructure strategies may benefit from proximity to institutional and sovereign linked capital.[3] It can be a factor that makes ADGM relevant for managers who rely on the relationship with institutions located in Abu Dhabi and long term capital providers for their fundraising.
These are better guidelines than rules. A hedge fund can be incorporated in ADGM and a private equity manager can opt for DIFC instead. The overall reputation of the jurisdiction may be a less significant factor than the investor base, location of the management and network of service providers.
Fund Domicile and Management Location
Also, investors and managers should take into consideration the difference between fund location and fund manager location. A fund can have its domicile outside the UAE and have its activities managed from the DIFC or ADGM, with the appropriate regulatory, tax and distribution requirements.
This distinction can have a significant impact on the structure. A manager may need to reflect on the location of the portfolio management processes, where staff are based, which regulator has jurisdiction over the portfolio management processes and how the fund is being marketed, and whether or not the services being used are able to accommodate the arrangement. These questions should be addressed prior to the creation of the fund, not as it is in effect.
Investor access and fund marketing.
The type of regulation also defines who can be sold interests in the fund. The public fund categories may be sold to retail investors and the private fund categories may be sold to professional or qualified investors, as appropriate.
More consideration needs to be paid to cross border marketing. The framework provides for a passporting regime between the Securities and Commodities Authority, the DFSA and the FSRA through which funds registered under the DFSA (or the ADGM) may be promoted across the UAE after the relevant registration. It is important for a manager to however confirm the existing requirements for the specific fund, investor type and distribution channel.
This is why distribution strategy is a key element in jurisdiction selection for investors. There may be extra compliance requirements a legally appropriate structure at is home centre could need to meet before it can be marketed to investors elsewhere.
Costs, Tax and Operational Requirements
The cost of setting up a regulated fund structure should not be simply the registration fee. Compliance, finance, insurance, audit, administration and legal advisers, as well as banking preparation, are among the cost areas that need to be considered in operating the office requirements. For regulated managers, the cost and effort of governance and compliance could be more important than the cost of incorporation.
The fees of DFSA could differ widely based on the financial service and may range from about USD 15,000 to USD 70,000. The fees for ADGM and FSRA are subject to the relevant permission profile.
Tax treatment needs to be evaluated individually. DIFC and ADGM are part of the UAE Corporate Tax regime. Any qualifying free zone treatment that may be available will be subject to the applicable conditions, such as income and activity, substance and compliance. A registration in a free zone should not thus be considered as an automatic tax exemption.
Another aspect is banking. The ownership and the ultimate beneficial owners, the source of wealth and the source of funds, the expected transaction flows, the fund strategy, the administrator, the custodian and the auditor may be examined by banks. All bank account approvals and investor allocations are subject to the approval of DIFC and ADGM. Therefore, banking requirements should be taken into account prior to finalizing the structure.
Key Considerations and Risks:
The primary risk is relying on a reputation alone jurisdiction. DIFC may be appealing owing to the critical depth of the Dubai financial community, and ADGM may be appealing owing to the institutional and private markets environment. Both of these are inadequate without taking a look at the specific fund strategy and investor base.
One danger is the assumption that fund types are the same, so the treatment of these funds is the same. The broad categories and minimum subscription amounts are quite similar but the two centres operate under different regulators, rules books, compliance criteria etc. Current thresholds, fees and capital requirements should be double checked prior to implementation as regulations are continually changing.
Tax should also be taken into account upfront in the structuring process.A fund should not be structured first and then taxed on that basis. The overall tax position may be influenced by the fund vehicle, fund manager, investors, flows of income and the substance requirements.
Last but not least, fund structuring should not be seen as a registration process. Reporting, governance and compliance and regulatory duties are not completed upon authorisation. Poor startup preparation can lead to delays and extra expenses at the start of the banking, funding or regulatory review process.
Which Jurisdiction Is Better for Investors?
There is no overall winner between DIFC and ADGM. A DIFC may be better suited when the fund structure relies on Dubai based banks, private wealth networks and/or professional advisers and a well established financial services infrastructure. However, ADGM may be better suited when institutional investors and private markets and capital from Abu Dhabi is a key part of the fundraising plan.
However, the more relevant question for investors is if the structure is aligned with the investment strategy and investor base. The resemblance of the main categories of the funds should not be a sole criterion for the decision. The practical relevance of legal familiarity, regulatory requirements, distribution arrangements, service providers, management location and tax considerations and operational substance may be more relevant.
Conclusion
Both DIFC and ADGM offer reputable jurisdictions for investment funds, but with different commercial ecosystems. Both Dubai and Abu Dhabi have a vibrant private markets ecosystem, and the depth of an established Dubai financial centre is complemented by DIFC’s presence. Both jurisdictions are not “better” for all the funds.
The more appropriate option is the jurisdiction that will suit the fund’s strategy, target investors, legal set up, regulatory scope and distribution approach and the long term operating needs. It is therefore important to start with the fund itself, and then look at the regulatory and commercial environment for the jurisdiction in question.
