Establishing a business within Dubai International Financial Centre (DIFC) is a world of opportunity, given the fact that it is a prominent financial center with a sound legal system. The stability, transparency, and internationally known regulatory regime of DIFC make it a place conducive to both new and existing businesses.
But getting around the laws of DIFC takes more than zeal. Most companies, especially startups, make serious legal blunders in their establishment and suffer from expensive fines, litigation, or even forced shutdown.
This blog spotlights the most frequent legal pitfalls in DIFC and offers sound, applicable tips on evading them.
1. Know About DIFC’s Unique Legal Landscape
Dubai International Financial Centre (DIFC) is one of the world’s top free zones in Dubai’s financial district, as it has a special legal structure. DIFC exists separately and legally under the laws and regulations of DIFC (and not the laws of the UAE federal government). The main regulators are:
- DIFC Authority: Manages company registration and administration.
- Dubai Financial Services Authority (DFSA): Regulates financial services within DIFC.
- DIFC Courts: Handles disputes within the jurisdiction.
To operate legally and effectively within DIFC as a business, an understanding of this unique legal framework is paramount. This unique framework permits businesses to have a clear legal framework. and provide voluntary compliance while minimizing the risk of costly legal mistakes.
2. Frequently Made Legal Mistakes
a. Poor Understanding of DIFC Licensing
Most companies wrongly believe that obtaining a DIFC business license permits them to conduct any business activity. However, each license is associated with certain business classes, and business activities beyond these classes can lead to the company experiencing compliance issues.
Solution: Make sure to get the appropriate license category for your business type. If in doubt, you should seek legal advice. Don’t assume you can engage in activities outside the scope of your license. Make sure no non-compliant activities are happening. This is important for operating legally and protecting the brand and your business.
b. Failing to Meet Corporate Governance Requirements
Companies normally fail to keep accurate company records, including director and shareholder records, which result in compliance issues. Inaccurate or out-of-date records have the potential to cause legal issues.
Solution: It is important to routinely keep your statutory registers up to date, submit your reports when necessary, and check that you are adhering to DIFC corporate governance standards for your company. If you wish to ensure compliance, professional corporate secretarial services can be a useful option. Keeping accurate records for transparency is important.
c. Ignoring Your Data Protection Compliance (DIFC DP Law 2020)
Most firms fail to address the compliance with DIFC Data Protection Law, putting themselves at risk of incurring significant fines and data breaches.
Solution: Register your data processing activities with the DIFC, appoint a data protection officer, if required, and put in place any data protection processes. Review your data protection policies regularly so that you know they are compliant with DIFC laws. Fines for noncompliance can be substantial.
d. Drafting Poorly Structured Shareholder Agreements
There are some companies that employ generic or poorly worded shareholder agreements that do not specifically state the rights and duties of stakeholders, resulting in conflicts.
Solution: Invest in a customized, legally sound shareholder agreement that reflects the rights and obligations of all stakeholders. Ensure it is reviewed by legal experts who are familiar with DIFC regulations. A clear agreement prevents disputes.
e. Ignoring DIFC Employment Law
Companies tend to mistakenly use UAE mainland labor laws for employees in DIFC, which results in non-compliance and disputes.
Solution: Comply with DIFC Employment Law, including employee contracts, minimum wage, end-of-service benefits, and annual leave entitlements. Consider consulting with employment law experts to avoid costly disputes. This protects employee rights.
4. Anti-Money Laundering (AML) Compliance
Financial businesses do not always enforce Anti-Money Laundering (AML) policies, putting them at risk with regulators.
Solution: Implement AML practices, undertake customer due diligence, and compliance reporting. Regular training sessions and awareness can keep your staff compliant. This is essential for financial integrity.
5. Having Good Corporate Governance
Some companies have poor corporate governance mechanisms, which may result in a failure to take responsibility and compliance issues.
Solution: Create a robust governance structure, comprising board meetings, shareholder resolutions, and transparent decision-making procedures. Governance reviews on a regular basis avoid compliance problems.
6. Planning for Business Expansion and Compliance
Companies at times expand without the licenses or compliance process being updated, creating legal issues as they expand.
Solution: Regularly review your business structure, licenses, and compliance obligations as your company grows in DIFC. Plan for scaling without legal risks.
7. How to Avoid These Mistakes
- Conduct thorough research on DIFC regulations before setup.
- Engage legal professionals who are knowledgeable about DIFC laws, such as Davidson & Co.
- Keep your compliance practices in review and up-to-date.
- Keep proper company records and have a data protection process.
- Use customized contracts, including shareholder agreements, that suit your business needs.
- Make sure your employees comply with DIFC Employment Law.
- Ensure financial transparency and tax compliance with expert guidance.
- Protect your intellectual property and maintain AML compliance where applicable.
- Implement a governance framework and plan for future growth.
Conclusion
DIFC business setup can be highly rewarding and enjoyable, but it’s important to have a clear understanding of the legal framework. By not falling into these general legal traps and taking proactive measures to address compliance, startup founders will be able to lay a sound foundation for their business. For additional guidance, consider obtaining legal advice from Davidson & Co.
