Over the last 12 months, structured finance transactions in the Middle East (both Islamic and conventional) have seen increased use of a comparatively new and previously underutilized type of special purpose vehicle (SPV) — the DIFC special purpose company (SPC). An SPC is a private company limited by shares incorporated under the laws of the Dubai International Financial Centre (the DIFC), a financial free zone located in the Emirate of Dubai with its own body of regulations and law and a separate court system. SPCs enjoy a number of features not shared by other types of DIFC entity. The SPC is specifically designed to be used in structured finance transactions.
Benefits of the DIFC
By virtue of being incorporated in the DIFC, an SPC offers a number of key benefits enjoyed by other types of DIFC entity, including:
- No foreign ownership restrictions. Unlike companies incorporated in the wider UAE, DIFC entities are not subject to any requirement that a certain percentage of shares be held by UAE nationals. One hundred per cent foreign ownership is permitted.
- Zero tax. There are currently no corporation, transfer, withholding, capital gains, inheritance or other taxes in the DIFC and no stamp duty is payable on the transfer of shares. Companies established in the DIFC also benefit from a guarantee, contained in Article 14 of Dubai Law No. 9 of 2004, that they will not be subject to tax for at least 50 years from 2004. This guarantee is renewable.
- Limited liability. The liability of shareholders in an SPC is limited to the amount of their commitment to the company’s share capital.
- DIFC law. An SPC enjoys the certainty afforded by the internationally-oriented, Englishspeaking regulatory and legal system of the DIFC, with access to the DIFC courts. In particular, an SPC has access to the DIFC’s sophisticated regime for the registration and enforcement of security interests, which is often a critical factor in selecting the jurisdiction in which to incorporate an SPV in a financing transaction.
- DIFC infrastructure. The DIFC is conveniently located in Dubai, a major financial centre for the Middle East, Africa, Asia and beyond, with access to a wide range of banks, investors and advisers.
Benefits of Using an SPC
SPCs are principally governed by the DIFC Special Purpose Company Regulations of 2008 (the SPC Regulations), which contain a number of important dispensations from the residual requirements of the DIFC Companies Law No. 2 of 2009 (the Companies Law) and the DIFC Companies Regulations of 2009. Specific benefits enjoyed by an SPC include:
No requirement to lease office space. Unlike an ordinary DIFC company limited by shares, an SPC is not required to lease and maintain a physical office within the DIFC. Instead, an SPC is only required to maintain a registered office address in the DIFC. This will ordinarily be the address of its Corporate Services Provider and is similar to the registered office requirement in leading offshore jurisdictions. The exemption enjoyed by SPCs from the requirement to lease physical office space in the DIFC removes a significant cost associated with being incorporated in the DIFC.
No requirement to maintain, file or audit accounts. Part 9 of the Companies Law does not apply to an SPC. Therefore, there is no requirement for an SPC to maintain accounts, have them audited or to file them with the DIFC Registrar of Companies (the RoC).
No AGM requirement. Article 62 of the Companies Law, which requires an annual shareholder meeting, does not apply to an SPC.
Exempt Activities The SPC Regulations provide that the purpose of an SPC, as set out in its articles of association, must be limited to performing “Exempt Activities”, which means any of the following, whether conducted in an Islamic or conventional manner:
- The acquisition (by way of leasing, title transfer, risk transfer or otherwise), the holding and the disposal of any asset (tangible or intangible, including but not limited to receivables and shares) in connection with and for the purpose of a “Transaction”.
- The obtaining of any type of financing (banking or capital markets), the granting of any type of security interest over its assets, the providing of any indemnity or similar support for the benefit of its shareholder(s) or any of its subsidiaries, or the entering into any type of hedging arrangements, in connection with and for the purpose of a Transaction.
- The financing of the “Initiator” or another SPC.
- The acting as trustee or agent for any participant in the Transaction.
- Any other activity approved in writing by the RoC.
- Any ancillary activities related to the activities mentioned above.
What is a Transaction?
A “Transaction” is defined in the SPC Regulations as being an “Islamic or conventional structured finance transaction for the benefit of the Initiator in connection with which the [SPC] has been established, which shall include, without limitation, any type of securitisations or other capital markets transaction.” The “Initiator” is defined as being the entity for whose Transaction the SPC has been established.
Restrictions on Use for Other Purposes
Because the SPC Regulations effectively limit their use to structured finance transactions, SPCs cannot be used as general corporate holding companies or to operate a trading business. They also cannot serve as the general partner of an investment partnership. An SPC cannot conduct “financial services” in or from the DIFC unless it is appropriately authorised and regulated by the DIFC’s regulator, the Dubai Financial Services Authority (the DFSA). In other words, its status as an SPC alone does not exempt it from the requirement to be authorised by the DFSA, where necessary. An SPC is also not an appropriate vehicle for situations where numerous shareholders are envisaged, since an SPC is not permitted to have more than three shareholders, and every shareholder must be either (i) a nominee holding the shares in the SPC on trust for discretionary purposes; (ii) the Initiator (or other participant in the Transaction); or (iii) another SPC. The restriction on who can be a shareholder in an SPC is a factor that should be taken into consideration in situations where it is envisaged that shares in the SPC may ultimately be transferred to third parties. Such transferees would need to qualify under one of these limbs. It should be noted that if an SPC fails to conform to the restrictions imposed by the SPC Regulations (whether by conducting activities that are not Exempt Activities, breaching the shareholder restrictions or otherwise) it is liable to lose its status as an SPC and be treated as an ordinary DIFC company limited by shares. This would make it subject to, among other things, the filing and physical office requirements applicable to ordinary DIFC companies.
Corporate Services Provider
One of the unique features of an SPC is the requirement to appoint a licensed Corporate Services Provider (a CSP). A list of authorised CSPs is published by the DIFC Authority. The role of the CSP is integral to the operation and management of an SPC. Among other things, the CSP will:
- Provide the majority of the board of directors of the SPC.
- Act as company secretary.
- Provide administrative services (which will usually include the provision of a registered office address for the SPC within the DIFC.)
- Handle filings and interaction between the SPC and the RoC.
The Story So Far
Since the SPC Regulations were passed in 2008, a total of 10 SPCs have been incorporated to date. All of these have been incorporated in the past 12 months.
One of the more high profile and innovative uses of an SPC to date has been by the Government of Dubai, which in 2011 chose to establish an SPC — named Salik One SPC Limited — for use as the borrower vehicle in a US$800 million financing transaction that involved the monetisation of revenues generated by Dubai’s “Salik” toll road system. The transaction included both Islamic and conventional tranches. As part of the financing structure, revenues generated by Salik are collected in an account held in the name of the SPC.
The SPC as a corporate vehicle boasts a number of attractive features which give it the potential to become an increasingly common alternative to established SPV domiciles, particularly for structured finance transactions focused on the Middle East, Africa and Asia.