SPVs in DIFC AND ADGM explained

A Special Purpose Vehicles (SPVs), also known as Special Purpose Companies (SPCs), is a separate legal entity formed to fulfill a specific and a limited objective. In simple terms, the SPV is an independent company which has its own legal status, assets and liability structure and maintains separate balance sheets (also known as off-balance sheets) from that of the parent company. It is a form of bankruptcy-remote entity, which can be explained as, when the parent company goes bankrupt it doesn’t impact the SPV created by this company and allows the SPV to operate. Likewise, if the SPV ends up in bankruptcy while carrying out a project involving high risks, it doesn’t affect the parent company which created the SPV to take on the project. 

 

BENEFITS AND USES OF SPVs:

• Risk Sharing: The corporations set up SPVs to shield themselves from ending up in any kind of bankruptcy while taking up projects involving high financial risks by allocating the risks among various investors involved in the SPV.
• Asset Transfer: Assets can be transferred to the SPVs, for the purpose of protecting them in situations like bankruptcy, as once they are transferred, the assets become unidentifiable. Similarly, it also helps in transferring of non-transferable assets, for instance gas plants or power projects, as a self-contained package in order to escape numerous compliances and permits. 
• Financing: The investments can be used for financing specific sectors by the way of ring-fencing. For instance, the Government sets up specific SPVs to fund certain projects.
• Real estate investment: It helps in purchasing and holding the property, thereby, limiting the recourse of mortgage lenders depending upon the location of the assets.
• Securitization: Companies can use SPVs to obtain financing by securitizing loans and receivables by selling assets to it. Based on the type of transaction structure, the SPV may be treated as a bankruptcy remote entity, thus, it isolates the assets sold to the SPV from risk, in the event of bankruptcy.
• Raising capital: It can help in raising capital based on the credit-rating of the SPVs than of the credit-rating of the company that formed this entity. 
• Intellectual property: Can separate the intellectual property as a separate structure enabling it to have minimal liabilities, thereby, helps in raising funds and also enter into license agreements with third parties.
• Tax benefits: Most of the SPV regimes grant various tax benefits, for instance, UAE tax treaty benefits.

 

SPVs in Abu Dhabi Global Market

Abu Dhabi Global Market’s SPVs intends to provide for a vast scope of businesses and industry sectors a smooth, adaptable and efficient system to set up SPVs in the form of a subsidiary company, project or joint ventures, with an objective of mitigating financial risks by giving such subsidiaries or joint ventures a separate legal status. ADGM’S feature of following the common law jurisdiction, along with its easily adaptable regime, has been successfully in drawing multitude of investors in the past few years. ADGM provides for two types of legal setups for SPVs: Private Company (Limited by Shares) – LTD and Restricted Scope Company.

 

• Private Company Ltd: The private limited companies are the most preferred forms of SPVs in the ADGM. The flexible regulations of ADGM convinces the investors all across the globe to establish their SPVs in ADGM. The private limited companies are usually opted by the investors who intend to have a holding company or take up operational activities. 

 

• Restricted Scope Company: The unique thing about this legal structure is that the information is not disclosed on the public register but full disclosure to the registrar is mandatory to form SPVs. A Restricted Scope Company can only be established as a subsidiary of a public company or as a family office. This is only limited to applicants who were able to meet certain criteria to set up a Restricted Scope Company.

 

Key Features of ADGM SPV:

• There are no restrictions as to the nationality of the share ownership.
• No minimum share capital, no maximum number of shares or shareholders, and different classes of shares are permitted.
• Corporate documents need not be attested, certified copies would be sufficient.
• Various options of legal structures to set up SPVs.
• Speedy and simple digital registration process.
• Highly competitive in process and fee.
• SPVs under ADGM need not have a physical office space, but are required to have a registered office for their SPVs. ADGM offers company service providers in helping with registered office addresses.
• Migration or continuance of existing corporate entities from other jurisdictions.
• ADGM SPVs can apply for a tax residency certificate from the Ministry of Finance through its feature of access to the double tax treaty network.
• The SPV must show a connection to UAE in some form, for instance, the SPV holds assets that are located in the UAE or in the Gulf regions (eg: Saudi Arabia)

 

SPV UNDER THE DUBAI INTERNATIONAL FINANCIAL CENTRE (DIFC)

In the year 2016, DIFC (The Dubai International Financial Centre) introduced a regime on the intermediate special purpose vehicles (Intermediate SPVs). The following regime has been established to meet the needs of the major investors and to provide them with a more time and cost-efficient structure to downstream their investments. This new regime reduces some of the requirements as to the establishment and operation of the DIFC limited companies and limited liability companies. One of the major benefits of this new regime is that it has simplified the application process and made the application forms shorter.  Also, the new regime grants the applicants to use the already existing space in DIFC as the registered office of the Intermediate SPV, thereby relieving them of leasing or acquiring additional office space for the purpose of establishment and operation of such an entity. 

The new Intermediate SPV will add to the DIFC’s existing Special Purpose Company (SPC) regime, which has gained popularity in the market, but it is designed to have a restricted application limited to only structures financing transactions, whereas, the Intermediate regime will provide for another option when it comes to structuring of investments from the DIFC, to be specific financing is not involved. Where the applicant intends to apply for more than one Intermediate SPVs, even though it may require separate application forms but one business plan would be enough as long as the Intermediate SPVs are part of the same overall investment structure. However, the business plan will have to include a number of regulatory confirmations with respect to the Intermediate SPV, along with, it will be used for a fund or a holding vehicle or for proprietary investment purposes and also a statement of that no other business will be undertaken. 

 

Key features of this regime

• The tax is neutral under the DIFC law as there are no corporate, transfer, withholding, capital gains, inheritance or other taxes applicable. Also, there are no charges of stamp duty applicable on the transfer of shares in a DIFC entity.
• The shareholders who are not UAE nationals can also have 100 % ownership. Companies, including SPVs are not subject to the foreign ownership restrictions.
• If the entity is owned by the UAE nationals, then such entities will be granted the status of a national company for onshore purposes within the UAE, thereby, allowing the use of Intermediate SPVs for structuring of complex transactions which involve onshore UAE assets.
• It also includes a feature of limited liability of shareholders. It allows the market participants to choose their exposure to specific investments in a cost-efficient manner. 
• The Intermediate SPVs will be able enjoy the robust regulatory and legal system under the DIFC law, along with the additional benefit of the primary language being English. Also, the investors can avail much benefit from the DIFC’S advanced system for the registration and the enforcement of security interests.

However, there is still an uncertainty at this stage if the Intermediate SPVs will be able meet the necessary minimum substance requirements to avail the eligibility of applying for a tax residency certificate from the UAE Ministry of Finance to benefit from the UAE’S double tax treaty network. If they did, then it would turn out to be a significant advantage over SPCs (Special Purpose Companies) as they are not currently eligible for tax treaty benefits in the UAE. 

 

Who can apply under this regime for Intermediate SPVs?

The Intermediate SPV can be only be applied by those who already have an established substantive presence in the DIFC and at the same time fall in one of the following categories to be a qualifying applicant:

 

• Collective investment schemes established in the DIFC and regulated by the Dubai Financial Services Authority (DFSA)
• Collective investment schemes established outside in the DIFC, but managed by a fund manager or asset manager that is regulated by the DFSA
• Holding companies or other holding entities, single family offices, or proprietary investment vehicles with a presence in the DIFC.

 

Also, the qualifying applicant must be able to prove the ownership of the proposed Intermediate SPV.  Thus, both the ADGM AND DIFC’S SPVs regime has its own influence on the market participants as per their needs and objectives. To know more on which jurisdiction suits you better to set up SPVs in UAE, please contact our specialized team of lawyers who can provide you with expert guidance in your decision making.