SPVs and Their Regulations in the UAE
A Special Purpose Vehicle (SPV) is a legally distinct entity created to isolate financial and legal risks. SPVs are commonly used to securitize assets, facilitate joint ventures, manage specific projects, or achieve particular financial goals while limiting exposure to liabilities. They offer numerous benefits, including enhanced asset protection, risk management, and operational flexibility. However, navigating challenges such as regulatory compliance, administrative complexity, and potential tax implications is crucial when setting up and operating an SPV.
Strategic Purposes of SPVs
SPVs are utilized for various strategic purposes:
- Risk Isolation: SPVs protect the parent company from potential losses by segregating the financial risk associated with specific projects or assets.
- Securitization: SPVs can aggregate financial assets, such as loans or receivables, and issue securities collateralized by these assets, thereby improving capital acquisition and risk mitigation.
- Asset Ownership and Management: SPVs can own and manage assets, such as real estate and intellectual property, isolating them from the liabilities of the parent company.
- Regulatory and Tax Efficiency: SPVs can be designed to take advantage of favourable regulations and tax regimes in specific jurisdictions, enhancing overall tax and regulatory outcomes.
This article explores the formation, features, and benefits of SPVs established in the UAE’s Mainland, as well as the specialized freezone jurisdictions of the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM).
SPV in Mainland UAE
In Mainland UAE, SPVs can be set up as holding companies for owning shares or assets. The formation and regulation of SPVs in the mainland are governed by the Securities & Commodities Authority (SCA).
Mainland UAE provides several advantages, such as no restrictions on office locations and the ability to own property in most parts of the UAE, which is beneficial for investment holding structures. SPVs in the Mainland must comply with the rules and regulations governing Limited Liability Companies unless otherwise stated in the SCA Decision.
However, setting up a holding company in the Mainland presents certain challenges:
- Economic Substance Requirements: To comply with the OECD Inclusive Framework and the European Union Code of Conduct Group on Business Taxation, the UAE introduced Economic Substance Regulations, which require companies with relevant activities, such as “Holding Company Business,” to maintain a substantial local presence and file annual reports.
- Shareholder Restrictions: Mainland SPVs cannot have more than 50 shareholders, which could limit some investment structures.
- Corporate Governance: Shareholder resolutions in mainland UAE require the presence of all shareholders, including dissenters, before a notary. This can be burdensome from a corporate governance perspective.
SPVs in ADGM
The formation of an SPV in ADGM is governed by the ADGM Commercial Licensing Regulations. To establish an SPV, the applicant must submit an application to the Registrar, including information about the firm’s structure, legal form, and controlled activities.
The ADGM regulations also include the “nexus” criterion, which ensures that SPVs are meaningfully connected to the UAE or the GCC region. The nexus criterion requires evidence that the SPV:
- Is owned or controlled by a UAE or GCC-based company, family office, or individual.
- Holds assets in the UAE or GCC or facilitates transactions related to the region.
- Issues securities listed by the Financial Services Regulatory Authority (FSRA) or traded on a recognized platform in ADGM.
ADGM also requires SPVs to engage a Company Service Provider (CSP), except for specific exemptions. The exemptions apply to companies licensed by the Central Bank of the UAE, those with shares listed on regulated markets, and those that can demonstrate an adequate presence in the UAE.
Unlike mainland UAE, ADGM does not impose restrictions on the number of shareholders an SPV can have, making it a compelling option for many investment structures.
SPV in DIFC
In DIFC, SPVs can be incorporated as a “Prescribed Company,” a corporate structure often used as a holding company to isolate and protect assets. The DIFC Prescribed Companies Regulations, provide a flexible framework for incorporation and permissible uses.
To form an SPV in DIFC, the applicant must submit an incorporation application to the Registrar. The SPV must demonstrate a link to the UAE or GCC region. According to the regulations, an SPV can be incorporated in DIFC under the following conditions:
- One or more GCC persons, a DIFC-registered person, or authorized firms must control the company.
- The company must be established in DIFC to acquire legal title or control GCC registrable assets.
- The company must be formed for a specific qualifying purpose, such as structured financing, intellectual property management, or crowdfunding.
- The company must have a director who works for a CSP with a relationship with the DIFC Registrar.
Similar to ADGM, DIFC SPVs require the appointment of a CSP to ensure regulatory compliance, including Anti-Money Laundering (AML) duties and annual reporting. The regulations also allow for direct submission of required documents and fees by CSPs to the Registrar.
However, DIFC imposes a limitation of 50 shareholders for most SPVs (Prescribed Companies), although exemptions exist for crowdfunding and structured financing purposes, such as bond or sukuk issuance.
Conclusion
The UAE offers a variety of jurisdictions for establishing SPVs, each with unique advantages and regulatory frameworks. Mainland UAE offers broad operational flexibility and property ownership rights but comes with shareholder restrictions and stringent economic substance requirements. ADGM provides a compelling option with no shareholder limitations and a clear nexus criterion, although SPVs must engage Company Service Providers unless exempt. DIFC offers a flexible structure, particularly suited for specialized purposes like structured financing and intellectual property management, although it imposes shareholder limitations and CSP requirements.
Ultimately, entities seeking to form an SPV in the UAE should carefully evaluate their specific needs and choose the jurisdiction that best aligns with their objectives, ensuring compliance with local regulations while taking full advantage of the strategic benefits that SPVs in the UAE offer.