Introduction
Ever wondered how SPVs can be advantageous for various stakeholders such as business families, investors, entrepreneurs, property investors, and existing companies? Here is a good read on the same!
Understanding SPVs
ADGM SPV is a Body Corporate whose sole purpose, either generally or when acting in a particular capacity, is to carry out one or more of the following functions:
- Issuing Investments
- Redeeming or terminating or repurchasing, whether with a view to re
- Issue or to cancellation, an issue, in whole or part, of Investments; or
- Entering into transactions or terminating transactions involving
- Investments in connection with the issue, redemption, termination or
- Repurchase of Investments, and has been explicitly established for the purpose of:
- Securitizing assets; or
- Investing in Real Property
An ADGM SPV allows the holding of various assets, including shares of private and publicly listed companies, real estate properties, intellectual property rights (such as trademarks), and more. It is important to note that SPVs are limited to engaging in “passive” activities and cannot operate actively. Consequently, SPVs do not have employees and are not eligible for work or residency visas in the UAE.
- Benefits of SPV
The flexibility of Asset Ownership
SPVs offer flexibility in asset ownership, providing advantages to various parties, including:
Investors and businesspeople who can corporatize their share ownership in UAE limited liability companies (LLCs) by utilizing SPVs.
- Real estate investors, both individuals and corporate entities, who can use SPVs to hold their property assets, whether it’s a single property or a portfolio. Large property portfolios can be allocated to different SPVs based on geography or property type.
- Inventors, companies, start-ups, and founders can use SPVs to hold intellectual property rights, allowing for licensing agreements and pooling of royalties or licensing fees.
- Business families with complex ownership structures can streamline their ownership at the family level by using SPVs to allocate different family companies to separate SPVs based on geographic or sector-specific divisions.
- Companies entering into a joint venture (JV) agreements can establish a specific SPV for the JV or use their own SPV to enter into the partnership.
Segregation of Risk
- As private companies are limited by shares, SPVs offer limited liability to shareholders. This means that shareholders’ liability is limited to their investments in the SPV, and their other assets are generally shielded from liability, except in cases where personal or corporate guarantees are provided. This segregation of risk allows for greater protection and separation of liabilities among different entities or individuals.
- Third-Party Beneficiary Arrangements
ADGM recognizes the use of third-party beneficiary arrangements, such as nominee agreements and trust agreements. These arrangements allow for the protection of third-party rights and enable one shareholder to hold shares on behalf of another party. For example, while Individual A may be the legal shareholder of an SPV, Individual B can be the beneficial owner of the shares.
Flexible Shareholding
ADGM provides a flexible shareholding regime, offering the following advantages:
- No residency requirements for shareholders.
- No minimum capital requirement.
- Multiple classes of shares can be issued, allowing for different rights such as voting rights, preferential, dividend, pre-emptive rights, etc.
- Incorporation of pre-emption rights, such as rights of first offer, drag-along rights, and tag-along rights, into the SPV’s Articles of Association or a separate shareholder’s agreement.
- Ease of share transfers.
- The ADGM SPV Nexus Requirement
When registering an ADGM SPV, applicants must demonstrate an appropriate connection or “nexus” to ADGM, the UAE, or the GCC to satisfy the ADGM Registration Authority. This can be achieved by showing that an individual, family, or company based in the UAE or GCC will own or control the SPV, or the SPV holds assets in the UAE or GCC, or the SPV facilitates transactions benefiting the UAE. Non-UAE residents solely holding assets outside the UAE or GCC are unlikely to meet the nexus requirement.
- ADGM SPVs and Tax Residency Certificates (TRCs)
Generally, ADGM SPVs are not eligible for Tax Residency Certificates (TRCs). However, if the SPV has a UAE parent company with operational assets in the UAE or owns an UAE subsidiary with operational assets in the UAE, it may be eligible for a TRC, subject to the discretion of the UAE Ministry of Finance.
- ADGM SPVs and Economic Substance Regulations (ESR)
ADGM SPVs engaged in holding company business or owning intellectual property rights may be subject to the Economic Substance Regulations (ESR). These regulations require companies to demonstrate adequate economic substance in the UAE.
SPV and Asset Securitisation
Factoring and securitization structures are commonly used by businesses to convert illiquid assets into cash flow. Factoring involves selling assets, typically account receivables, to banks and financial institutions at a discounted price. In contrast, securitization structures aim to obtain funding from not just the banking sector but also the wider investment and capital markets.
An SPV plays a crucial role in achieving the twin objectives of transferring assets for the benefit of investors and creating capital market instruments in a securitization structure. SPVs are solely created to hold the assets to be transferred by the originator, ring-fencing them for the SPV’s beneficiaries. The SPV also issues financial instruments that provide exposure to the underlying assets. Investors indirectly acquire these assets through the securities issued by the SPV, depending on their risk appetite. While the SPV becomes the legal owner of the underlying assets, it acts as a conduit between the assets and the ultimate investors, making the security holders the ultimate beneficiaries.
Foreign investors often face challenges setting up onshore SPVs and implementing securitization transactions due to restrictions on foreign shareholding and filing requirements under UAE law. Additionally, UAE law does not recognize the concept of trust, which is a critical structuring tool in securitization. However, the legal frameworks of ADGM and DIFC are based on English and common law, allowing the use of trust structures in connection with the SPV regime.