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UAE Freezones Biz News Updates
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DIFC lessons point the way for Abu Dhabi's new free zone
The planned future site of the Abu Dhabi Securities Exchange on Al
Maryah Island is at the heart of the new financial free zone.
Sheikh Khalifa, President of the UAE, recently issued Federal Decree No 15
of 2013 establishing a new financial free zone in Abu Dhabi. The name of the
free
zone will be Global Market Place Abu Dhabi or Global Marketplace (GMAD).
In accordance with the UAE Constitution and the Financial Free Zones Law No
8 of 2004, the UAE Cabinet issued resolution No 4 of 2013 stating that the
free zone area will be located on Al Maryah Island. The marketplace authorities
will be composed of the Global Marketplace Courts, which comprises a lower
court
and courts of appeal, a companies registry and a financial services
regulator, the Financial Services Regulations Bureau (the authority).
The assumption is that the legal system will be based on English common law
and the dominant language of the marketplace will be English.
It is expected that various regulations will be passed, including those to
cover employment, companies and insolvency. No details as to the content or
structure of
these regulations have been announced.
The announcement has led to broad-brush comparisons with the Dubai
International Financial Centre (DIFC).
Commentators may have overlooked the fact that the concept of establishing a
financial zone was actually first conceived by Abu Dhabi in the late 1990s.
Saadiyat Island was the original location chosen for the financial free
zone. For various reasons, this did not go ahead. Dubai then picked up on
the idea,
establishing what later became the DIFC, the first operational financial
free zone in the UAE and the wider region.
GMAD is expected to be a full-service financial free zone, accommodating a
complete range of financial activities, from investment banking and capital
markets
to asset management, commodities trading and finance, brokerage and trading
in securities, commodities and derivatives.
In addition, GMAD will offer market trading through the buying and selling
of currencies, commodities, metals, securities, bonds, instruments and
financial
derivativesas well as provide Islamic financing and other Islamic banking
activities. Companies can be 100 per cent foreign-owned, earning and
repatriating
profits tax-free.
Among the incentives is 50 years "zero taxation" for investors, free-zone
authorities, companies and their employees. This includes income tax
relating to
activities taking place within the marketplace, and any transfer of assets,
profits or wages to any destination outside the marketplace in any currency.
These
incentives are virtually identical to those provided by the DIFC, and it is
fair to assume that the regulations that have been drafted for Gmad have
been based
predominantly on the DIFC laws and regulations, indeed with some of the same
shortfalls that we are seeing today within the DIFC framework.
The announcement of the establishment of an Abu Dhabi financial free zone
begs the question as to whether the UAE needs two financial services hubs
and
whether the new financial free zone will have any impact on the DIFC.
Some officials have stated that the idea behind establishing GMAD was to
cover the global trading gap for the few hours between the closing of the
Asian
markets and the opening of the European ones. This was also one of the main
business cases for establishing the DIFC, and over time this has proven not
to be a
successful model.
Other officials claim that GMAD will be different from the DIFC, arguing
that it will not be a free zone but an actual trading platform supported by
Abu Dhabi's
wealth and financial institutions, which might well make sense. Although
GMAD will be competing with the DIFC in certain areas, it may not have a
significant
impact on the business of the DIFC. GMAD will be supported by Abu Dhabi's
cash-rich banks and financial institutions, which are, in any event, not
very active
in the DIFC. It is also likely to provide these banks with a suitable
platform to conduct international trading and transactions.
It is unfortunate that the legislation passed so far contains some of the
same shortfalls from which the DIFC legislation suffers. For example, the
legislation
refers to memorandums of understanding to be entered into between the GMAD
courts and the local courts to regulate the enforcement of judgements issued
by
GMAD courts in the local Abu Dhabi courts. This is the same approach that
the DIFC courts took recently, possibly mistakenly.
Article 7(2) of Law No 12 of 2004 establishing the DIFC Judicial Authority
provides that judgements rendered by the DIFC courts shall be automatically
enforced by the Dubai courts. The DIFC, however, chose the path of
concluding a memorandum of understanding with Dubai courts for the
reciprocal
enforcement of judgements between the DIFC Courts and the Dubai Courts.
The memorandum of understanding was not needed and actually defeats its own
purpose, as enforcement of a judgement based on it can never be as solid as
enforcement based on statutory provisions.
In order for GMAD to be successful it has to learn from the lessons of the
DIFC. It is arguable that the DIFC went astray in two main areas,
subsequently
affecting its business. The first was that it did not focus on its core
business - to attract the top 500 companies in the region; instead, it
focused on property
activities and retail.
This strategy, although it led to the speedy accumulation of revenue,
ultimately proved detrimental to the growth of the exchange business.
Another possible
mistake was the expansion of the DIFC jurisdiction beyond its federal
mandate, which could open the door for possible constitutional challenges in
the future.
Hopefully GMAD will tread more carefully in its approach.
Jun 10, 2013 |
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Courtesy The National
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