Why asset managers are increasingly pivoting to Abu Dhabi

With the Capital of the UAE developing an international financial center and free trade zone (“FTZ”) called Abu Dhabi Global Market (“ADGM”) in recent years, it is perhaps not surprising to see Abu Dhabi become an increasingly preferred jurisdiction for investment. ADGM has quickly emerged as a diversified financial services hub for local, regional and international institutions, and a place in which companies can conduct business in the UAE with confidence and ease. 

In our first blog in this series, we considered why asset managers are rethinking historical jurisdictions for cross-border investment arrangements, particularly in light of the changing tax environment and in anticipation of government measures in response to COVID-19.

 In this second blog, we will look at why Abu Dhabi is a top jurisdiction for investment as organizations transform for the new reality ahead.

The global asset managers that we work with tell us that ADGM has created a very attractive regulatory, legal and tax environment. In particular, ADGM has put into place legal and regulatory frameworks that bring features specifically designed for asset management and that permit the formation of common cross-border structures. Fund managers located both within and outside ADGM are permitted to establish ADGM entities. These include: 

• Master/feeder structures
• Limited Partnerships
• Open or Closed Ended Investment Companies
• Investment Trusts
• Protected Cell Companies and Incorporated Cell Companies
• Restricted Scope Companies
• Umbrella Funds
• SPVs and holding companies

In addition, fund managers can establish many different types of funds in ADGM, including:

• Mutual Funds
• Hedge Funds
• Private Equity Funds
• Property Funds
• REITs
• Listed Funds
• Sharia compliant Funds
• Venture Capital Funds

Such funds are subject to differing levels of regulation and investor protection depending on whether they are retail focused and made available by public offering, or whether they are available only to professional and targeted clients by private placement. 

Beyond asset management, ADGM offers licenses to financial service providers, as well as other businesses including professional, commercial, construction, family office and entrepreneurial ventures. ADGM creates its own regulations and has established a Registration Authority (“Registrar”), Financial Services Regulatory Authority (“FSRA”), the ADGM Courts, and an Arbitration Centre to enforce these rules. The result is that ADGM provides a sophisticated and flexible regime attractive to both asset management and other businesses, contributing to an attractive commercial ecosystem in Abu Dhabi.

There are several other features that are drawing investors to ADGM, including:

• Support of foreign ownership
  • 100% foreign ownership of ADGM companies
  • ADGM companies are permitted to do business across the UAE
• Familiar legal and regulatory frameworks
  • Common law (and not mainland UAE civil / commercial law) based on English law
  • Corporate disputes are either litigated or arbitrated in English within the ADGM court system
  • Financial services are regulated by a forward-thinking FSRA
• No personal or corporate income tax, and sophisticated tax treaties 
  • There is no corporate or personal income tax. VAT of 5% applies under the same rules as the mainland.
  • The UAE has over 100 tax treaties in force, nearly all of which reduce the withholding tax and capital gains tax rates.
  • The UAE is a member of the OECD Inclusive Framework on BEPS and is committed to implementing the BEPS minimum standards across the UAE and within ADGM. This means ESR rules apply to ADGM entities and certain levels of economic substance must be maintained by ADGM entities that undertake specific “Relevant Activities.”
  • There is a clear process for ADGM entities to apply for a UAE tax residence certificate from the UAE MOF. 
  • Several tax treaties contain “favored nation” clauses offering tax rate reductions down to the most favorable rate agreed by the treaty country under any other tax treaty.

Clients who are pivoting to ADGM entities tell us that the ADGM framework balances a business-friendly environment for industry practitioners, while retaining appropriate levels of investor protection. For investors and asset managers either with existing operations in the region, or looking to establish an office or expand in the Middle East, the combination of ADGM‘s stable and sophisticated legal structure and access to tax treaties make ADGM an attractive option for legal entity structuring.

Of course, there are other jurisdictions that are gaining popularity amongst asset managers and investors during this time, and we’ll cover another jurisdiction in the next article in this series. We welcome your questions and feedback on this overview in the meantime.