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In this article, we will discuss the use of Special Purpose Vehicles (‘SPV’) as a holding company. We will also discuss how business families, investors, entrepreneurs, property investors and existing companies can use a SPV to their advantage. Unless otherwise mentioned, the discussion will be in the context of a SPV registered in Abu Dhabi Global Market (‘ADGM’).
What is a SPV?
A SPV is a type of company that its shareholders set up for a specific purpose. One can use an ADGM SPV to hold assets such as shares of private companies (e.g. UAE mainland limited liability companies (‘LLCs’)), shares in publicly listed companies, real property, intellectual property rights (‘IP rights’) (e.g. trademarks), etc.
A SPV can only engage in “passive” activities and it is not allowed to act in an operational manner. So while for example, a SPV can hold shares in a construction company or a software development company, the SPV cannot itself engage in construction activities or software development activities. On this basis, the SPV does not have employees and would not be eligible for any work or residency visas in the UAE.
An ADGM SPV is not permitted to rent a physical office for purposes of registration, and is required to use the registered office of a group company (e.g. parent or subsidiary) based in ADGM or that of a corporate service provider registered in ADGM.
ADGM is an English common law jurisdiction, and it applies certain (amended) provisions of common law and equity. In other words, ADGM recognises the use of equitable arrangements such as nominee agreements and trust agreements. Foreign investors who are investing in in UAE mainland LLCs can consider combining both a SPV and equitable agreements. This can help foreign investors to both protect their interests and comply with the UAE mainland local ownership requirements.
Why use a SPV?
1. Flexibility of asset ownership
Many different parties can benefit from using a SPV. For example:
2. Segregating risk
A SPV would be in the form of a “private company limited by shares”. Since the SPV is a private company, the liability of the shareholders would be limited to any investment made (or yet to be made) in the company. The shareholders’ other assets (i.e. outside the SPV) would generally not be exposed to liability, except where, for example, a shareholder made a personal guarantee or a corporate guarantee regarding the liability.
So to follow the examples from above, the liabilities of the following would be separated from one another:
3. Third party beneficiary arrangements
As mentioned above, ADGM recognises the use of third-party beneficiary arrangements such as nominee agreements and trust agreements. ADGM approves their use so long as the agreement is compliant with ADGM’s provisions.
This can be relevant for SPV shareholders who want to protect the rights of third parties, or where the parties agree for one shareholder to hold the shares on behalf of another party. So while for example “Individual A” can be the 100 per cent legal shareholder of an SPV, ADGM allows that “Individual B” can be the 100 per cent beneficial owner of the shares.
4. Flexible shareholding
ADGM has a flexible shareholding regime where:
Other considerations regarding the SPV
1. The ADGM SPV nexus requirement
When applying to register an ADGM SPV, the applicants must satisfy the ADGM Registration Authority, which is the ADGM companies’ regulator, that the SPV will have an appropriate connection, or ‘nexus’, to ADGM, the UAE or the GCC. This means the applicant must demonstrate that, and the ADGM Registration Authority must be satisfied that:
However, a non-UAE resident individual or company, that will only hold assets based outside the UAE or GCC is unlikely to meet the nexus requirement.
2. ADGM SPVs and Tax Residency Certificates (‘TRCs’)
The UAE is a signatory to several double-taxation treaties worldwide. The UAE Ministry of Finance is the party that reviews applications for TRCs, and which decides whether or not to issue them.
Generally, ADGM SPVs are not eligible for TRCs. However, if the SPV has an UAE parent company that has operational assets in the UAE, or if the SPV owns an UAE subsidiary that has operational assets in the UAE, it may receive the TRC (subject to the Ministry of Finance’s discretion).
3. ADGM SPVs and Economic Substance Regulations
“The Cabinet of Ministers Resolution No. 31 of 2019 Concerning Economic Substance Regulations” (‘ESR’) applies to all entities in the UAE whether these are registered on the mainland or in free zones. The ESR specifies certain activities, and companies that perform these activities must demonstrate adequate economic substance in the UAE.
A SPV generally would be performing the “Holding Company Business” activity as per the ESR. To the extent the SPV owns any IP Rights, it would also be performing the “Intellectual Property Business” as per the ESR. This means that the SPV would be required to demonstrate adequate economic substance in the UAE according to the guidelines set for both those activities.
An ADGM SPV is a holding company that business families, investors, entrepreneurs, property investors and existing companies can customise to cater to their needs. The SPV is flexible enough to hold shares, property, and IP rights. The SPV may make use of multiple share classes with different rights, as well as third-party beneficiary arrangements such as nominee agreements and trust agreements.