Fund Management Legal Framework in the UAE, DIFC and ADGM

The Fund Management Legal Framework in the UAE: Onshore, DIFC and ADGM

The United Arab Emirates (UAE) has quickly established itself as a global financial hub, attracting asset managers and institutional investors from around the world. Behind this growth sits a detailed, multi-layered UAE fund management legal framework, designed to protect investors, maintain market integrity and support business. Any firm that plans to establish, manage or promote investment funds in the Emirates needs to understand this framework.

Related: Explore our Mainland Company Formation services.

The UAE’s regulatory landscape operates on three pillars: the federal onshore regulator, the Securities and Commodities Authority (SCA), and two internationally recognised financial free zones, the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). Each jurisdiction offers its own advantages, regulatory style and fund structures.

Related: Explore our Free Zone Company Formation for Foreign Investors services.

This guide explains the regulatory environment of all three pillars and what each means for fund management in the UAE.

Pillar 1: The Onshore Regulator – The Securities and Commodities Authority (SCA)

The Securities and Commodities Authority (SCA) is the federal regulator responsible for overseeing financial activities and markets across mainland UAE (outside the financial free zones). The DIFC and ADGM have historically attracted most international fund managers, but the SCA’s recent regulatory updates show a clear intent to modernise and streamline the onshore market.

The New Regulatory Landscape: A Shift in Foreign Fund Promotion

A key development in the UAE fund management legal framework came with the issuance of the 2023 Funds Regulations. These regulations changed how foreign funds can be promoted in onshore UAE:

• End of public offering: A public offering of foreign funds in onshore UAE is no longer permitted. This means foreign funds, including popular European structures such as UCITS, can no longer be registered with the SCA for a public offering to retail investors.
• Mandatory private placement: Foreign funds can now only be marketed on a private placement basis to Professional Investors.
• Mandatory registration: The SCA clarified that the "Professional Investor" exemption under the SCA Rulebook does not apply to the private offering of foreign funds. All foreign funds seeking to raise capital from Professional Investors in mainland UAE must therefore still be registered with the SCA for this private offering.

This change is widely seen as an effort to encourage global asset managers to establish a physical presence and domicile their funds in the UAE, rather than simply marketing foreign products.

Onshore Fund Structures and Licensing

For fund managers who want to operate onshore, the SCA offers a route to establish local funds. One option for foreign fund managers is to obtain an SCA fund management licence and establish local public feeder funds. These feeder funds invest in foreign public funds, allowing the foreign manager to offer its products indirectly to retail investors in the UAE.

The SCA has also introduced modern structures such as Protected Cell Funds (PCFs). A PCF is a single legal entity within which multiple distinct cells can be created. The assets and liabilities of each cell are legally segregated from those of the other cells and from the core of the PCF, offering a high degree of asset protection and operational flexibility.

Nour Attorneys Insight: The SCA’s licensing requirements and the new rules for foreign fund promotion call for specialised legal advice. Our team advises on obtaining the necessary financial services licensing in onshore UAE and on full compliance with the latest SCA regulations.

Pillar 2: The Common Law Hub – Dubai International Financial Centre (DIFC)

The Dubai International Financial Centre (DIFC) is a leading financial free zone in the Middle East, with its own civil and commercial laws based on English Common Law. It is regulated by the Dubai Financial Services Authority (DFSA), which takes a principles-based approach comparable to major global financial regulators.

The DIFC’s appeal lies in its zero-tax environment, 100% foreign ownership and a robust, internationally recognised legal framework that gives global fund managers certainty and familiarity.

Fund Manager Licensing in the DIFC

To establish and manage a fund domiciled in the DIFC, a firm must typically be licensed by the DFSA. The two main routes are:

1. DFSA-licensed fund manager: A firm licensed by the DFSA to carry out the financial service of 'Managing a Collective Investment Fund'.
2. External fund manager: A manager based outside the DIFC that is regulated in a recognised jurisdiction and appointed to manage a DIFC fund.

Key DIFC Fund Structures

The DFSA offers a range of fund structures suited to different investor profiles and investment strategies. They are designed to be flexible and competitive with those in other leading financial centres. For each structure, the investor profile, minimum subscription and key features are:

• Qualifying Investor Fund (QIF): Professional Investors; US$500,000; fast-track registration, minimal regulatory oversight, highly flexible.
• Professional Investor Fund (PIF): Professional Investors; US$100,000; simplified regulatory process, suitable for smaller private offerings.
• Retail Fund: Retail Investors; no minimum; subject to the most stringent regulatory requirements, allowing public offering.
• Hedge Funds and Private Equity: Professional Investors; minimum varies; the framework is particularly well suited to sophisticated alternative investment strategies.

The DIFC also offers the Prescribed Company (PC), a cost-effective vehicle often used for holding assets, as a special purpose vehicle (SPV) or as a general partner for funds. It benefits from reduced incorporation and licensing fees.

Nour Attorneys Insight: Establishing a fund in the DIFC requires careful planning, from choosing the right fund structure to obtaining the necessary DFSA licence. Our lawyers specialise in company formation in the DIFC and make sure your fund vehicle is structured for regulatory compliance and operational efficiency.

For professional legal guidance, see our Corporate Governance Advisory, Legal Consultation Services in Dubai and Contract and Agreement Drafting service pages.

Pillar 3: The Global Gateway – Abu Dhabi Global Market (ADGM)

The Abu Dhabi Global Market (ADGM), located on Al Maryah Island, is the UAE’s second major financial free zone. It is regulated by the Financial Services Regulatory Authority (FSRA) and also applies English Common Law directly, providing a comprehensive and familiar legal environment.

ADGM stands out for its focus on innovation, particularly in FinTech, and for a wide range of legal structures that support complex wealth and asset management strategies.

ADGM Fund Structures

The FSRA’s framework is highly flexible and supports many fund types and vehicles, which makes it a popular choice for a range of investment approaches.

• Collective Investment Funds (CIFs): As in the DIFC, ADGM offers various CIFs, including Qualified Investor Funds, Professional Investor Funds and Retail Funds, each with corresponding regulatory requirements.
• Venture Capital (VC) funds: ADGM has frameworks designed specifically for start-up, boutique and emerging fund managers, supporting an active VC ecosystem.
• Specialised funds: The ADGM framework is particularly supportive of specialised products, including Sharia-compliant funds and Green/Climate Transition Products, in line with global sustainability trends.
• Umbrella structures: The framework allows Umbrella Funds, where a single legal entity can hold multiple distinct sub-funds, each with its own investment objective, offering administrative and cost efficiencies.

The ADGM Advantage: Legal and Tax Environment

ADGM’s robust legal environment is complemented by its tax-efficient status. The free zone benefits from the UAE’s extensive network of Double Taxation Treaties (DTTs), making it well placed for managing both regional and international portfolios. Its range of legal structures, including trusts and foundations, adds to its appeal for sophisticated wealth and asset management.

Nour Attorneys Insight: The structure of your fund and its management company is central to tax efficiency and operational flexibility. Our corporate structuring specialists can advise on using ADGM’s legal vehicles, including trusts and foundations, to meet your investment and succession planning goals.

The UAE Passporting Regime: Bridging the Jurisdictions

A key feature of the UAE fund management legal framework is the passporting regime, a collaborative agreement between the SCA, the DFSA and the FSRA. It allows funds domiciled in the DIFC or ADGM to be marketed in onshore UAE under certain conditions, bridging the regulatory gap between the free zones and the mainland.

This gives fund managers in the financial free zones a significant advantage: they can reach the large onshore investor base while keeping the common law and tax advantages of the DIFC or ADGM.

Choosing a Jurisdiction: Key Considerations for Fund Managers

Choosing the right jurisdiction is the most important decision for any fund manager entering the UAE market. The choice depends on several factors:

1. Target investor base:
   • Onshore (SCA): Mainly for local public feeder funds targeting retail investors, or for foreign funds targeting Professional Investors through private placement.
   • DIFC/ADGM: Well suited to funds targeting institutional and Professional Investors, with a clear route to market to the onshore Professional Investor base.
2. Regulatory preference:
   • DIFC/ADGM: Preferred by international managers seeking a familiar English Common Law environment and principles-based regulation (DFSA/FSRA).
   • Onshore (SCA): Governed by UAE Federal Law.
3. Fund type and strategy:
   • ADGM: Strong for VC, Sharia-compliant and other specialised structures.
   • DIFC: Strong for traditional hedge funds, private equity and sophisticated alternative strategies.

The UAE’s commitment to a zero-tax environment, together with its extensive DTT network, makes it a highly attractive location for fund domicile and management. However, VAT, corporate tax (where applicable) and international tax obligations all require careful planning.

Nour Attorneys Insight: The introduction of Corporate Tax in the UAE requires a review of all fund and management company structures. Our tax advisory team helps keep your operations compliant and tax-efficient under the new rules.

Conclusion

The fund management legal framework in the UAE is a detailed, multi-faceted system that reflects the country’s ambition to be a top-tier global financial centre. The interplay between the SCA, the DFSA in the DIFC and the FSRA in ADGM gives fund managers a range of options, from the flexible common law regimes of the free zones to the evolving, modernised onshore market.

For international and regional fund managers, the UAE offers a gateway to the MENA region, a tax-efficient environment and a regulatory structure built on international standards. By understanding the specific requirements and advantages of each jurisdiction, fund managers can position themselves well in one of the world’s most dynamic financial markets.

Related Services: Explore our Trustee and Escrow Services and Real Estate Law Advisory for practical legal support in this area.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. Readers should seek professional legal advice tailored to their specific circumstances before making any decisions or taking any action based on the content of this article.

Nour Attorneys Team

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