Special Purpose Companies or Vehicles (the SPCs or SPVs) are temporary companies set up to achieve a precisely structured financial operation. SPCs provide an alternative mode of financing transactions. Put simply they are subsidiary companies of a parent company, whose assets are protected from the actions of the parent company. In short, they limit financial risk to the property of the SPC.
Special Purpose Vehicles have played a significant role in the seamless operation of global financial markets. Commercial objectives of corporates, multinationals and institutional, as well as non-institutional investors, could be realized by raising capital, securitizing the assets, risk sharing, tax benefits, and carrying out planned activities. These practical features of special purpose company absolve corporations from the risk element.
SPCs can choose to operate on separate balance sheets than their parent companies (called ‘off-balance sheets’). SPCs provide their shareholder's limited liability. SPVs generally operate on independent balance sheets instead of recording transactions on their parent or holding companies. For this reasons, parties often consider SPVs as off balance sheet vehicles. Firms can use these entities as synthetic lease to possess assets independently and is treated as an expense in revenue statements rather than a liability on company's balance sheet. SPVS are commonly used for following transactions:-
• Securing Projects: - SPCs can help firms secure projects from financial, commercial or operational failures of entity
• Securitizing loans and receivables. SPVs play a significant role in securitizing loans and other receivables. Governments, for instance, set up SPVs to fund their projects in particular sectors and the SPC entity acts as a catalyst to channelize funds for projects in different areas.
• Transfer of Assets: SPCs can safeguard firms in the event of bankruptcy or liquidation given that assets once transferred to SPC they become unidentifiable. That said, courts in many countries have ruled that SPC's assets and funds should be linked to the originating firm. Likewise, assets that are difficult or impossible to transfer (for example, power projects or gas plants), parties can transfer such assets as a self-contained package and thereby avoid undergoing a multitude of compliance and permits.
• Regulatory and Compliance: SPVs can be set up within orphan-like structures thereby preventing regulatory and compliance mandates.
• Financing and Raising Capital: SPCs can be used to finance new projects without increasing costs or altering the shareholding. This aspect makes SPVs an obvious choice to finance aircraft(s), power projects, and infrastructure projects.
The Dubai International Financial Center
In the Dubai International Financial Center (the DIFC), foreign owners are entitled to incorporate SPCs which are used to finance routine transactions. The company which establishes the SPC (the Initiator) is authorized to operate the SPC in the areas of acquisition, granting security interests over assets, financing other SPCs, as well as the parent company, or any other activity approved of in writing at the time of incorporation with the Registrar. These areas of practice are officially known as “exempt activities.” Acting outside the scope of exempt activities subject the SPC to a fine of USD 5,000.
The DIFC itself provides an attractive venue for establishing one's SPC due to its separate regulatory framework, including the Dubai Financial Services Authority (DFSA) and Courts. These structures operate on a common law basis, in the English language, providing investors across the globe an easy access point to the Dubai investment market.
SPCs do not have their accounts filed nor audited annually. Also, there is no formal requirement for shareholders to be based physically within the DIFC itself. The Corporate Services Providers (CSP) can act as majority directors and company secretary of the SPC. These CSPs are entitled to receive administration services from third-party management providers and are not required to be appointed directly. However, the majority of directors of the SPC must be employees of the Corporate Service Provider.
It is possible to incorporate SPC as the person(s) (natural or legal) including a shareholder; the CSP; or through any law firm or accounting practice. Incorporation of SPCs in DIFC is carried out per the DIFC Law Number 2 of 2017 (the Companies Law), and the respective Companies Regulation. Formation of SPCs is also possible electronically, by attaching electronic documents submitted within one month of submission. Failure to provide these documents within the one-month time frame subjects the SPC to a fine of USD 2,000.
Incorporation costs are nominal, with the minimum values of shares totaling USD 100. The cost of company formation itself is a mere USD 1,000, with no requirement of obtaining a commercial license. Despite this, SPCs have a limitation in their general scope of action within the meaning of the previously outlined activities. Voluntary winding up of SPCs is possible only in the event a declaration is filed in writing that there are no outstanding liabilities, and (if accepted) the dissolution shall be published on the DIFC online site.
The Abu Dhabi Global Markets
The inflow of investments into the country plays a vital role in the elevation of its economy. Dubai plays an important part in this regard since it houses numerous free zones such as the DIFC that confers with the international corporate governance and financial sector regulation norms. Abu Dhabi, realizing this potential for investments in the financial sector, established the Abu Dhabi Global Markets (the ADGM). Since then, the ADGM has played a vital role in the attracting foreign investors into the country, especially those wishing to incorporate special purpose vehicles.
The ADGM grants investors with a comparatively lenient SPV regime than that of the DIFC since there is no explicit constraint on the number of shareholders. Investors may opt for one of the following legal structures to set up an SPV in the ADGM:
i. RSC or Restricted Scope Company
The main advantage of an RSC is the curb on the information that should be disclosed to the public (although, investors should note that they may be required to provide all the information regarding the SPV to the registrar). This form of legal entity is used as a family office or a subsidiary of a public company.
ii. LTD or Company Limited by Shares
Investors who wish to incorporate a holding company or intends to undertake operational activities opt for LTD. These are private limited companies and one of the most common forms of SPVs in the ADGM.
We have noticed a growing trend whereby investors around the globe prefer to establish their SPVs in the ADGM due to their (relatively) flexible regulations. Investors do not have to attest their corporate documents, and there is no minimum share capital for company formation in the ADGM. Although, SPVs in the ADGM may have to provide a registered address in the free zone at the time of company incorporation. But this rule does not necessitate them to have a physical office space. There are numerous options whereby an investor can obtain a registered office address without actually having a physical office space in the free zone (such as choosing a physical space or appointing an agent). ADGM also offers investors with the option of relocating their existing companies from certain other jurisdictions (as long as the firm is authorized to make this transfer by the domestic laws of that jurisdiction). Investors should take the advice of a law firm in Abu Dhabi that provides bespoke legal advice in company formation and is well-conversant with the regimes of the ADGM before initiating the company formation process.
The common law jurisdiction of the ADGM along with their flexible legal regime has attracted an immense number of investors in the past years. Numerous SPVs have been set up in the ADGM for investing in the real estate sector, acquiring and holding intellectual property, asset transfer, risk sharing, raising capital, etc.