The number of new licences issued by the Qatar Financial Centre dropped to 14 in 2013, prompting a strategic rethink. Efforts to introduce tax incentives and attract more non-financial companies seem to be working. Published in Gulf States News, 2 October 2014
Without much fanfare, the Qatar Financial Centre (QFC) has been gradually shifting its strategy, allowing local companies to set up special purpose vehicles (SPVs) and trying to attract more non-financial firms, in what appears to be a tacit admission that its previous focus on reinsurance, captive insurance and asset management has failed to provide the desired volume of business.
The authorities had been targeting those three sectors with a view to differentiating Doha from the likes of the Dubai International Financial Centre (DIFC), which dominates the regional financial scene. But in recent years, the number of licensed firms being added to the public register by the QFC Authority has been steadily declining, from 22 in 2011 to just 14 in 2013.
Taking only those firms that need to be approved and regulated by the QFC Regulatory Authority (QFCRA – the independent regulator of the QFC, established in 2005 to authorise and regulate firms and individuals conducting financial services from the QFC), the level of interest looks even more disappointing. In 2011, a total of eight regulated firms gained a licence, followed by three in 2012, and four in 2013. Although it is a low-tax, onshore centre with a bespoke legal system based on international law, the QFC has found it difficult to entice reinsurance firms away from their existing global hub of Bermuda, or even captive insurance companies from neighbouring Bahrain. There has been more success in attracting asset management firms, but not enough to offset the disappointing level of activity in the other areas.
As a result, the QFC Authority has adopted a multi-layered strategy, according to sources in Doha. One element is to try to attract more non-financial firms, such as architects, consulting engineers and non-financial PR companies, to seek licences.
A potentially more significant change was made in January, when the QFC Authority amended its regulations to allow local companies to set up SPVs in the QFC. That was followed in June by changes to the tax regulations, which created further tax incentives for Qatari companies operating from the QFC, including making it more attractive for them to invest overseas via a holding company or SPV established in the QFC. “Qatari-owned entities stand particularly to benefit and will now find it advantageous to set up structures in the QFC which previously they could only establish abroad,” Sheikh Salman Al-Thani, chief financial and tax officer for the QFC Authority, said in a statement in July.
Two major local companies, Qinvest and Qatar Petroleum International (QPI), have already taken advantage of the new rules, with Qinvest gaining three licences for ‘special purpose company activities’ during June and August, and QPI gaining one licence in early September. If these early movers continue to set up more SPVs, other local companies could follow their lead.
Previously, Qatari firms have set up such vehicles in locations such as the Cayman Islands and the British Virgin Islands. Part of the attraction of going offshore was the commercial confidentiality these jurisdictions offered – something that was hard to achieve when working via regular Qatari government departments. “It should be easier to do transactions under the radar as things are easier to keep confidential with the QFC,” one executive in Doha told GSN. “If you do anything in the usual bureaucracy then anyone who is anyone in Qatar knows about it within 24 hours.”
The authorities are announcing the changes in a piecemeal fashion, such is the delicacy involved in acknowledging the failure of the previous strategy. “The old QFC strategy failed, but they are very sensitive about talking about these changes,” the executive said. “No-one will admit on the record that the old strategy was a failure.”
But despite the reticence, the new approach appears to have had some success beyond the four SPVs licensed during the summer. By early August, the number of licences issued in 2014 had overtaken the figure for the whole of 2013. As of 21 September, the number for the year to date stood at 19 licences.
The changes come at a potentially vital time for the QFC, which will soon face an even more competitive regional environment. Abu Dhabi Global Market, a new financial free zone which looks to be a direct rival to the DIFC, will soon open its doors on Al Mariah Island. Any financial company with ambitions to work with the Abu Dhabi emirate’s government will almost certainly have to establish a presence there. At the same time, Riyadh is also likely to start attracting more financial firms, following the decision in June by Saudi Arabia’s Council of Ministers to allow international investors to invest directly in the Tadawul stock market.
The continued strong performance of the Qatari economy means that it will still represent an interesting opportunity for a lot of firms, but it is a relatively small market, and the potential rewards on offer in the UAE and Saudi Arabia will look more enticing to many companies. That means that the QFC is likely to continue finding it hard to establish itself as a regional financial hub. In that context, the QFC Authority’s attempt to get more local firms to set up subsidiaries and SPVs look like a sensible move – the long-term outlook for the centre may simply be as a place where companies service the needs of the local economy rather than use it as a base for the wider region.