Establishing an SPV in the ADGM

  • 20-12-2018
 

The Abu Dhabi Global Market (ADGM) has been open for business only since October 2015, but it has already garnered much praise and respect over its efforts to differentiate itself through unique offerings. It recently concluded the inaugural FinTech Abu Dhabi summit, attended by over five hundred global Financial Technology (FinTech) personalities; and has launched a series of collaborations with different companies such as Temenos, Al Ansari, and Mastercard to help forward its FinTech initiative.

Another such initiative is the Special Purpose Vehicles (SPV) regime. The SPV regime is open to a wide variety of uses, from investor-friendly holding structures, to asset separation and transfer. 

What is an SPV?

SPVs are usually established to isolate financial and legal risk by ring-fencing assets and liabilities. SPVs can be established as subsidiaries, project or joint venture vehicles to ensure that only those assets related to a transaction are exposed to the liabilities associated with that transaction. 

Features of an ADGM SPV

An ADGM SPV offers multiple classes of shares, a first for the region. Coupled with an option to completely customise the Memorandum, the ADGM SPV provides a viable option for a range of holding and investment structures.

Other salient features include:

  • No attestations for corporate documents
  • Shelf SPVs permitted
  • No restrictions on nationality of ownership
  • Minimum requirement of just 1 shareholder and 1 director 
  • No minimum share capital
  • No maximum number of shares

What can an ADGM SPV be used for?

The typical uses of an SPV include:

Securitisation

Can be used by an originating party to securitise loans (or other receivables) by creating an SPV which purchases these assets by issuing debt, secured on these underlying assets. 

Real Estate Investments

Can be used to acquire title to real property and limit recourse of mortgage lenders depending on the location of the asset. In some jurisdictions the sale of the SPV’s shares can result in lower taxes and transaction fees when compared to transferring the asset.

Financing

Can be used to ring-fence certain investments, permitting financing without leading to an increase in existing debt levels for the parent firm or exposing the parent’s assets (or SPV’s assets) to cross-liabilities.

Asset Transfer

Can be used to transfer assets in conjunction with material agreements. 

Risk Sharing

In cases of joint ventures, can be used to form specific project-based companies. This would reflect agreed management responsibility while legally isolating joint venture partners from risks associated with the joint venture         .

Raising Capital

Can be used to raise capital, with credit worthiness determined by the collateral of the SPV, rather than the credit rating of the parent firm.

Intellectual Property

Can be used to separate Intellectual Property into a separate structure, which has minimal liabilities and can be used to raise funds and enter into license agreements with third parties. 

Legal Structure

The following main options are available:

  1. 1. Private Company Limited by Shares – LTD

A standard private company limited by shares. 

  1. 2. Restricted Scope Company – RSC

This offers limited information disclosure on the public register; however, full disclosures would have to be made to the Registrar. To account for the fact that this less stringent approach could prejudice shareholders and creditors, RSCs may only be incorporated as a subsidiary of a public company, or as a family office.

Tax Residency

ADGM SPVs can be eligible to apply for a Tax Residency Certificate from the Ministry of Finance to avail the UAE’s Double Tax Treaty network. The SPV may need to fulfil certain additional criteria. 

Economic Substance:
 
The UAE Ministry of Finance released the Economic Substance Rules in April 2019. Consequently, the ADGM, like other free zones, listed additional requirements for the structures offered, including ADGM SPVs. The two main criteria are:
 
The SPV can only act as a passive holding company, invest in downstream entities and enjoy dividends and royalties. It cannot carry out any trade or service, and 
hence cannot issue invoices or have clients.
 
The SPV will have to demonstrate basic substance within the UAE. Two mandatory requirements are:
 
a) the authorised signatory will have to be a UAE-resident and
 
b) the SPV will have to hold some assets within the UAE. This can be in the form of shares in an underlying UAE-based free zone entity. 
 
These criteria have to be met in order to get authorised. The underlying assets have to be identified, and an undertaking signed that confirms the execution of the 
stated transaction within 6 months of licensing. 
 
Note: In case of Saudi-based transactions, this requirement (b) is waived. The SPV will not have to prove additional UAE-based substance in case one of the authorised signatories is a GCC-resident, and the investment is made in Saudi Arabia. 

Office space requirement

SPVs are not required to have dedicated physical office spaces; however, they would need to maintain a registered address in the centre. The ADGM allows for the use of the offices of ADGM-based service providers, for this purpose.  

Costs

The fee payable to the Registrar in the first year is US$ 1,700. The recurring annual fee is US$ 1,200 in subsequent years. This doesn’t include other fees such as registered address and corporate service provider fees. 

Bottomline

The SPV regime in the ADGM is well structured, flexible and very cost-effective. Offering an onshore holding structure, based in a well-regarded jurisdiction, will provide comfort to regional investors, as well as others who wish to conduct business or hold investments in the greater MENA area.

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