Memoranda of understanding recently entered into by the Dubai Land Department with the Dubai International Finance Centre Authority and Nasdaq Dubai, respectively, aim to facilitate institutional real estate investment in Dubai, and have implications for real estate funds domiciled in the DIFC.

In early May 2017, the Dubai International Finance Centre (DIFC) Authority, the governing body of the DIFC, and the Dubai Land Department (DLD) announced a memorandum of understanding (DIFC MoU) that sets out new rules and procedures to facilitate institutional investment in real estate in the Emirate of Dubai (Dubai) by DIFC entities.

Key changes for DIFC property funds include the following:

• A DIFC fund can now hold onshore property in Dubai directly

• Where a DIFC fund admits additional investors, a flat notification fee will be payable to DLD rather than the standard transfer fee based on property value (the transfer fee will still apply on transfers of interest in the DIFC fund)

The DLD also recently entered into a memorandum of understanding with Nasdaq Dubai (Nasdaq Dubai MoU) and, as a result, DIFC Real Estate Investment Trusts (REITs) and property funds that are listed on Nasdaq Dubai do not pay either of the above fees and are exempted from DLD fees on the purchase of properties in Dubai.

Neither the DIFC MoU nor the Nasdaq Dubai MoU, nor any related client handbook, has yet been released; this LawFlash summarizes the new rules as communicated by the DIFC at a seminar on May 18, 2017.

Background

Ownership of real estate in the United Arab Emirates (UAE) is subject to foreign ownership restrictions. Non-Gulf Cooperation Council (GCC) persons or entities can only own freehold in certain “designated zones.” There has been a tension between the desire to foster institutional investment in UAE real estate and the need to ensure that these foreign ownership restrictions are not circumvented by the use of pooled investment vehicles.

Although corporate ownership of Dubai real estate has been expressly permitted by the DLD for some time, it has required onerous verification of ultimate beneficial owners (including extensive notarization and translation requirements) as well as the use of corporate vehicles primarily established in the Jebel Ali free zone (JAFZA).

Historically, there has been a lack of clarity over (1) the ability of real estate funds established in the DIFC to hold Dubai property directly and (2) the DLD fees payable in the event of an indirect change in property ownership due to the admission of new investors or the transfer of an investor’s interest at the level of the DIFC fund or above.

It is important to understand that the DIFC MoU does not alter the restrictions on foreign ownership of real estate in the UAE in any way; the ability of a real estate fund established in the DIFC to hold UAE real estate will still depend on the nationality of the investors in the DIFC fund. If all investors are GCC nationals, the DIFC fund will be able to hold real estate throughout the UAE; if any investors are non-GCC nationals, then the DIFC fund will only be able to hold property in the “designated zones.”^[1]

The DIFC MoU

Direct Ownership of Dubai Real Estate

The DIFC MoU provides that “Eligible Entities” can be registered as owners of Dubai real estate without having to utilize a JAFZA holding structure. “Eligible Entities” means partnerships, most companies, and all entities constituting a collective investment scheme and regulated as a fund by the Dubai Financial Services Authority (DFSA), in each case which have been established in the DIFC. DIFC trusts that are not regulated as a fund cannot rely on the MoU, and DIFC special purpose companies (SPCs) also are excluded.

Registration of Eligible Entities as owners of Dubai real estate will be achieved by establishing a formal cooperation between the DIFC Registrar of Companies (Registrar) and the DLD. The Registrar will, for a fee yet to be announced, verify the Eligible Entity’s beneficial owners and provide the verification documentation along with a no-objection certificate to the DLD—all of which must be provided in both Arabic and English. Each Eligible Entity also will need to make certain acknowledgements and undertakings in relation to direct and indirect transfers of beneficial ownership. No further documentation, notarization, or translation will be required for the DLD. The DLD retains its power to approve or deny the registration of the property, but if approved, the DLD will register the Eligible Entity as owner.

The standard DLD property transfer fee, equal to 4% of the value of the property transferred, will apply on acquisition of the property by the Eligible Entity.

Direct Transfers and New Issues of Shares or Interests in the Eligible Entity

Each Eligible Entity registered as an owner of Dubai real estate will be noted on a separate register maintained by the Registrar. No direct transfer or new issue of shares or interests in such Eligible Entities will be registered by the Registrar unless and until the Registrar receives a no-objection certificate from the DLD. When notified of the proposed transfer, the Registrar will request such no-objection certificate from the DLD by supplying the DLD with a standard form and verification documents in respect of the proposed transferee.

The DIFC also has agreed to a special regime of fees in connection with new issues of shares or interests in Eligible Entities that are regulated as funds by the DFSA; a flat notification fee of AED10,000 will apply.^[2] This is intended to take account of the one- to two-year closing period mechanism that is standard in closed-ended funds, so as not to unfairly penalize funds for this element of their structure. It should be noted that all real estate funds established in the DIFC must be closed-ended.

The notification fee above only applies on new issues of interests. Where an existing interest in an Eligible Entity is transferred, the DLD’s standard transfer fee will apply, calculated as 4% of the value of the property held by the Eligible Entity multiplied by the percentage interest transferred.

The DIFC has yet to announce what fees will be charged by the Registrar in connection with obtaining the no-objection certification from the DLD for direct transfers and new issues.

DIFC property fund managers will need to ensure that their fund documents allocate the notification fee to subsequent closers, and the transfer fee to transferees, so as not to penalize other investors in the fund.

Indirect Transfers

Pursuant to the DIFC MoU, the Registrar is required to monitor Eligible Entities that own Dubai real estate and ensure that they do not permit indirect transfers of beneficial ownership, for example, where such an Eligible Entity has a corporate shareholder and that corporate shareholder has a change of ownership. In addition to the acknowledgement and undertaking that each Eligible Entity must submit to the DLD when registering any Dubai real estate, this oversight is achieved by the Registrar requiring quarterly confirmations from each Eligible Entity that owns Dubai real estate as to such Eligible Entity’s ultimate beneficial owners.

Where any indirect transfer has occurred, the same process (requiring a no-objection certificate from the DLD) and fees will apply as for direct transfers.

DIFC property fund managers will need to ensure that they can obtain these quarterly confirmations from their investors.

A framework for enforcing the prohibition on indirect transfers is being developed. Penalties for Eligible Entities that own Dubai real estate and do not comply with the limitations on indirect transfers are expected to include fines, notification to the DLD and limitations on the ability to purchase Dubai real estate, and suspension of the Eligible Entity’s commercial licence.

Other Transfers

Where a legal transfer occurs but the ultimate beneficial owners remain the same (and retain the same ultimate beneficial ownership proportions), a lower fee of 0.125% of the value of the property will be charged by the DLD (“hiba” or the gifting fee). This will be relevant for

• transfers from a DIFC entity to its interest holders;

• transfers from individual(s) to a DIFC entity in which the same individuals hold interests; and

• transfers from another entity to a DIFC entity where each entity has the same interest holders.

Nasdaq Dubai MoU

The Nasdaq Dubai MoU includes additional new rules as to DLD fees that apply only to DIFC property funds and DIFC REITs, in each case which are listed on Nasdaq Dubai—namely that such vehicles are exempted from DLD transfer fees upon the purchase of properties, upon direct or indirect transfer of shares, or upon any new issue of shares. This represents a significant advantage for these listed DIFC property funds as compared to private DIFC property funds, and it remains to be seen how the property fund market in the DIFC will develop in light of the new, bifurcated DLD fee regime.

_{[1] A detailed discussion of the foreign ownership restrictions applicable to UAE real estate is beyond the scope of this LawFlash.}

_{[2] The DIFC Authority has stated that this figure is already under review with the DLD, and the DIFC Authority hopes to have this adjusted downwards.}