Regulatory Updates for the United Arab Emirates Q2 2023

We cover the Dubai Financial Services Authority (“DFSA”) updates to its Rulebooks, including changes to Single Family Offices’ registration requirements, and consultations papers on fixed penalty notices and money services, crypto tokens, and crowdfunding. We also cover the Abu Dhabi Global Market’s (“ADGM”) territorial expansion and consultation on several investment business related items, as well as the Securities and Commodities Authority (“SCA”) updates on tax relief for small businesses, VASPs applications and guidance on marketing of foreign funds.

DFSA

Rulebooks and Laws

• Following the end of the consultation periods on March 24, 2023 for the proposed legislative changes that were set out in Consultation Papers No. 148, the DFSA made the below mentioned amendment to the DFSA Rulebooks which came into force on June 1, 2023 (Notice of Amendments).

1. DFSA - General Module

Single Family Offices can now be subject to financial regulations. Any family office looking to set up in the DIFC should discuss with the DFSA to determine whether their activities would need to be subject to the DFSA regulations.

Consultation Papers

1. Fixed penalty notices

On April 18, 2023, the DFSA published Consultation Paper No. 149 (CP1479). Comments needed to have been submitted to the DFSA online (Survey) before July 17, 2023. 

• The DFSA proposes the introduction of a fixed penalty regime to deal with certain breaches of prescribed provisions of its legislations.
• Proposed Rule changes apply to Authorised Firms, Authorised Market Institutions, Registered Auditors, DNFBPs and all other entities that are required to submit regulatory returns to the DFSA.
• The proposed rule change will be implemented in two stages. At the first stage, the regime will apply to breaches of certain reporting requirements (i.e., failure to submit regulatory returns by their due date). At the second stage, the fixed penalty regime may expand its application to other simple breaches of DFSA legislations.
• The Fixed Penalty Notice (“FPN”) regime proposal will be applied through the following 4 step process:
  • The DFSA identifies a contravention of a prescribed provision subject to a FPN.
  • The DFSA issues a FPN. The person has 14 days to pay the penalty and remedy the alleged contravention.
  • When the person complies with the FPN, the DFSA will not seek to fine or publicly censure the person.
  • Where a person does not comply with the FPN in the specified period, the DFSA may launch enforcement proceedings.

• The maximum penalty that can be specified in a FPN is proposed to be USD 50,000. The FPN is applied using a tiered approach, where the amount of the penalty increases for each contravention in a calendar year. For example, the penalty for the first contravention is USD 2,500 and USD 7,500 for the second contravention.

2. Proposals in relation to Money Services, Crypto Tokens and Crowdfunding

On April 27, 2023, the DFSA published Consultation Paper No.150 (CP150). Please note the deadline for responses to this Consultation Paper has now closed. 

• The DFSA proposes several amendments to the Money Services, Crypto Token and Crowdfunding regimes.
• For the Money Services regime, the proposed rule change clarifies the rules on providing and operating Payment Accounts, provides examples of what constitutes a Payment Instrument, proposes to allow cash out from a Stored Value account in the UAE and amends the reconciliation requirements for providers holding Client Money.
• For the Crypto Token regime, the proposed rule change clarifies provision AMI 5B.6.1, confirms that wrapper or wrapped tokens are approved for use in the DIFC and proposes to limit the referral of clients to non-DIFC businesses that offer access to Crypto products and services to firms that are subject to requirements similar to the DFSA crypto regime.
• For the Crowdfunding regime, the proposed rule change announces the implementation of electronic reporting templates to the Electronic Prudential Reporting System (“EPRS”) of the DFSA. 

ADGM

Regulatory updated and news

1. ADGM Expands Territory

On May 8, 2023, the Abu Dhabi Global Market (“ADGM”) announced an expansion of its jurisdictions to Al Reem Island as part of Cabinet Resolution No. (41) for 2023. The expanded territory makes the ADGM the largest financial district globally and meets the growing demands of firms wishing to establish in the region. In addition, firms interested in establishing in the ADGM may benefit from the 0% corporate tax, various office arrangements, and lifestyle options as part of the ADGM Growth Strategy 2023-2027.

You can read more detail here.

Consultation Paper

On the March 30, 2023, ADGM issued a public consultation paper seeking views concerning proposed enhancements to its regulatory framework in relation to client classification, client asset and certain conduct requirements relating to the investment business. The specific areas of focus within these suggested enhancements include:

• Client classification – simplifying the assessment standards for Professional Clients;
• Client assets – providing clarity on the requirements in relation to holding or controlling client assets, and other client protection measures; and
• Conduct requirements in relation to investment business – additional client protection measures in terms of the duties owed by approved firms to their clients.

UAE

1. Ministry of Finance announces corporate tax relief for small businesses

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (the “Corporate Tax Law”) has been amended by Ministerial Decision No. 73 of 2023 on Small Business Relief on April 6, 2023.

Small Business Relief lowers the corporate tax burden and compliance expenses for start-ups and smaller firms. The Ministerial Decision on small business relief defines the terms of the carried forward tax losses and disallowed net interest expenditures under the small business relief program. It also outlines the revenue level and requirements for a taxable person to elect for small business relief. 

Further details of the relief measures can be found here.

2. SCA open to receiving applications from VASPs

On April 17, 2023, the Securities and Commodities Authority (“SCA”) declared that it had begun processing license applications from businesses seeking approval to offer virtual asset services.

All UAE-based businesses that offer virtual asset services, other than those located in freezones, are required to submit a licensing application to the SCA. On the other hand, businesses operating in the emirate of Dubai should follow the licensing process of submitting their license application to the Virtual Assets Regulatory Authority (“VARA”) in addition to requesting the SCA’s approval.

The Financial Activities Rulebook has also undergone legislative changes in relation to virtual assets. Brokers, custodians, and platform operators for virtual assets were among the new financial activities that were included. Additionally, a new category for virtual asset service providers (“VASP”) was created, and a new annexure was added to Chapter 3 of the Financial Activities Rulebook, containing virtual asset portfolio provisions, such as creation, management, and controls.

Further details of the announcement can be found here.

3. SCA issues Guidance on Marketing Foreign Funds

The SCA, in partnership with Morgan Lewis, issued additional guidelines on marketing foreign funds in mainland UAE following the enactment of SCA Decision No. (02/RM) of 2023, Decision No. (03/RM) of 2023, and Decision No. (04/RM) of 2023. The SCA confirms the extension of binding promotion contracts allowing the promotion of foreign funds to retail investors until March 31, 2024. The extension allows foreign fund managers to form SCA-licensed fund management entities. Deadline extensions will be permitted on a case-by-case basis, subject to a successful application to the SCA.

You can read the article in full here.