Joe Worthington

The emirate of Dubai, which has weaned itself off natural resources earlier than neighboring states, is focused on attracting international financial companies to its tax-free enclaves. These free zones, which in many cases are self-governing and free from state interference, have been contributing around 33 percent of the UAE’s gross domestic product since mid-2015. However, Dubai has taken free zones a step further by giving them significantly more economic and legal freedom than in other emirates by establishing a parallel judiciary, heightening visibility of the innate judicial problems within Dubai proper.

Dubai has two categories of free zones. The first are trade zones, such as the Jebel Ali Free Zone and Dubai Airport Free Zone, geographic areas usually surrounding seaports and airports where goods are manufactured, stored and exported with low or zero taxation. A second, more specialized type is the free economic zone, which aims to encourage localized economic activity in the areas of banking, insurance and company registrations – for example, the Dubai Gold and Diamond Park and Dubai Production City. Free zones contribute a significant amount of secondary wealth to the Emirati economy, and have become havens for companies that prefer to avoid strict Emirati requirements – including laws requiring 51 percent local ownership of companies operating in Dubai, high corporation taxes for foreign corporations and the controversial and restrictive kafala employment system.

The resulting disconnect between free zones and the wider emirate is increasingly affecting more than just the investment climate. The Dubai International Finance Center, an even less regulated “Federal Financial Free Zone,” benefits not only from tax-free status but also exemptions from both federal and Dubai-specific laws. The establishment of the DIFC necessitated passing Federal Law 8 of 2004, an amendment to the UAE’s federal constitution that allowed financial free zones to be established in any of the emirates, exempting all of them from all federal and commercial laws in the country. This is still having repercussions today: Ras al-Khaimah is pushing for more general independence to construct free zones without federal approval. This law also laid the foundations for judicial independence within the DIFC. Since it was established in 2004, the DIFC has had its own judicial system, a series of courts headed by retired British judges trained in English common law, and a British-style legal system that is applicable only within the boundaries of the district; and all cases are tried in English. This is unique to the DIFC, and no other federal financial zones have yet been granted their own judicial system.

The system offers a stark contrast to Dubai’s aging and complex Franco-Egyptian judicial system – which itself differs from the legal system of the wider UAE – and is forcing the emirate to grapple with its shortcomings. Dubai follows a civil legal code that does not abide by precedents, must be undertaken in Arabic and is based on a small selection of primary legal codes and thousands of pieces of secondary legislation, both of which are struggling to modernize after four decades of changes since federalization in 1971. Companies based in the DIFC can choose between the zone’s own legal system or that of Dubai, creating a growing division between the civil system used in domestic law and the free zone’s “foreign” common law system. In addition, Dubai courts no longer have the authority to intervene in DIFC court decisions.

In 2011, Dubai Law 16 extended this opt-out from federal domestic law by allowing courts within the DIFC to rule on cases from outside free zone if the parties involved have agreed in writing to opt for the DIFC’s jurisdiction – though there are as yet no publicly available examples of this happening. The discrepancy has exacerbated social divisions between those who have the resources to afford expensive lawyers operating within the DIFC’s jurisdiction and those who left to contend with domestic law. This sentiment has gotten so strong that the Dubai authorities have started looking to upgrade their own judicial system. In early April 2017, the government of Dubai’s Legal Affairs Department signed a memorandum of understanding with the DIFC Authority to share best practices from the free zone’s legal system with Dubai’s lawyers and judges.

The DIFC unveiled a 10-year plan in late 2014 that aims to make the free zone the world’s leading financial center. By 2024, the DIFC aims to increase the number of companies registered in the free zone from 362 to 1,000, have these firms earn an additional $400 billion in profits, and increase the zone’s workforce from 17,860 to 50,000 people. There are also plans to align this agenda with the Dubai Plan 2021, which will introduce Islamic finance into the zone.

The 2024 Strategy has been slowly introduced since early 2015, but has had limited success because, in an internationalized world, the DIFC is competing with other free zones in the Middle East, primarily in Qatar, to attract new companies to register. By February 2017, the number of companies registered in the DIFC had increased by 10 percent to 447, the balance sheet had increased to $144 billion and the workforce had risen to 21,611. The strategy will likely prompt judicial reforms within Dubai’s legal system once the two systems become more closely linked. Likewise, applying Dubai’s current Islamic finance laws to the DIFC may require Dubai to revisit them, as Shariah financial regulations forbid interest-bearing activities, while the DIFC is largely based on profits, loan interests and free trade.

Though the 2024 Strategy is primarily aimed at extending Dubai’s reach into the international financial arena, it is undoubtedly also an attempt to bring both the legal systems of the DIFC and Dubai closer together in response to mounting criticisms. Essa Kazim, chairman of the DIFC Authority board of directors, said, “This MoU falls in line with our 2024 Strategy, as we encourage robust best practices and further develop services and business capabilities that ensure the delivery of growth in the coming years. The DIFC has evolved as the most transparent, secure and professional regulatory and legal system in the region.” DIFC judges are also training an increasing number of Dubai’s judges through a 13-week program run by DIFC courts, teaching them English common law procedures, best practices and international business protocol. And in early May 2017, the DIFC and Dubai authorities signed a dual-licensing agreement allowing DIFC-registered nonfinancial companies to operate both within the free zone and in Dubai. This established a central data repository that largely follows DIFC laws but that both DIFC and Dubai authorities can access, demonstrating increased cooperation on compliance, fraud prevention and increased consumer protections.

Abu Dhabi and the other smaller Emirates within the UAE are slowly but surely starting to copy Dubai and the DIFC’s example, including Sharjah’s USA Regional Trade Center, which works with specifically U.S.-based small and medium-sized enterprises; and Global Marketplace Abu Dhabi, which has its own Global Marketplace Registration Bureau and Financial Services Regulation Bureau, separate from the judicial system of Abu Dhabi, offering flexible financial regulations and simplified processes for businesses to register there even if they do not physically operate from the free zone.

Free zones, in which companies can be fully foreign-owned – and in the case of the DIFC have their own legal system – seem to be an efficient and low-cost method of diversifying the economy away from the increasingly volatile oil industry. However, by creating a rift between Emirati law and an Anglocentric judicial system that can take precedence over local law, the free zones are increasingly becoming closed-off enclaves, highlighting the growing divisions within Emirati society.