ADGM Regulations for SPVs and Foundation
“Regulation needs to catch up with innovation”
The ADGM's Registration Authority published a consultation document in October proposing a regulatory regime for the use of CSPs in the ADGM. The public consultation began against the backdrop of rising interest in and success with incorporating SPVs and foundations into the ADGM. The results of the recommendations that were subjected to the public debate have recently been implemented through a series of revisions to the ADGM's rules, notably the Companies Regulations 2020, the Commercial Licensing Regulations 2015, and the Foundations Regulations 2017. As of April 12, 2021, the legal regime controlling CSPs in the ADGM is in place.
SPVs and foundations in the ADGM are now required to appoint a CSP that is permitted to operate in the ADGM, unless they are exempt, under the revisions to the legislation introduced by the ADGM. CSPs, in turn, are subject to a slew of rules controlling, among other things, record-keeping and the protection of client funds. SPVs, foundations, and CSPs, as well as their officers and councilors, shall be held accountable for failing to comply with the new regulatory requirements, and fines may be imposed. In this update, we summarize the important regulatory requirements in the ADGM that apply to SPVs, foundations, and CSPs, as well as the appropriate transitional period deadlines.
What is an SPV?
A Special Purpose Vehicle (SPV), also referred to as a Special Purpose Company (SPC) or a Special Purpose Company (SPE), is a 'bankruptcy-resistant' entity. An SPV is typically a subsidiary that is protected if the original company goes insolvent and deemed isolated if the parent firm goes bankrupt. An SPV could be used to fund, purchase, and sell stock often held on the off-balance sheet to limit responsibility and isolate financial risk. The Abu Dhabi Global Market (ADGM) or the Dubai International Financial Centre are two options for forming an SPV in the UAE (DIFC).
ADGM's SPV framework is considered a strong dynamic and cost-effective asset holding and investing structure. The regime provides more freedom to business owners and asset owners while also separating financial and legal risks. SPVs follow company regulations rather than distinct regulations, thanks to the direct application of English Common Law, which assures consistency across all corporate vehicles.
The most prevalent application of an ADGM SPV in the UAE is to own shares in other firms. It can essentially act as a 49 percent foreign stakeholder in an onshore UAE LLC, allowing the shareholders to collectively possess assets and intellectual property in a strong local English Common Law jurisdiction. The following are some of the most common uses of an ADGM SPV corporate vehicle:
- Risk Allocation enables a company to legally separate legal and financial risks. SPVs are frequently used to construct project companies for joint ventures, as they reflect management tasks while isolating the joint venture partners' risks.
- Finance - An SPV could be used to raise funds without adding to the parent company's debt or exposing the parent's assets to cross-liabilities. It also allows investors to invest in specific initiatives directly rather than the parent company.
- Securitization - Companies frequently employ SPVs to securitize loans or other receivables. The SPV can buy these assets by selling securities to capital market investors.
- SPVs can be used to purchase properties in the real estate market. If the property sales tax is higher than the capital gain tax, the SPV can be sold instead of the properties, and the capital gain tax is paid instead of the property sales tax.
- Asset Transition - Because some assets are difficult to transfer, a parent company may establish an SPV to hold these assets. When they want to sell the asset, they can sell the SPV as a standalone package when they want to sell the asset.
- Obtaining Funds - When raising capital, an SPV may be able to obtain favorable borrowing rates. Because the SPV owns the underlying assets, it may have a better credit rating than the parent company.
What is a Foundation?
Wealth management, wealth planning and preservation, succession planning, asset protection, and tax planning are all things for which foundations and trusts are used. While trusts are common-law terms, foundations are a civil law notion that originated in continental Europe.
However, unlike trusts, foundations are incorporated as a legal body with their unique characteristics and legal personality. Foundations are similar to corporations in this regard. However, they do not have shareholders. A foundation is a legal entity that owns assets in its name on behalf of beneficiaries. It must be founded with one or more legal objectives.
Foundations are away for a family's different asset holdings to be consolidated under a single top holding company. Using a Foundation to store family assets, whether business interests, property, financial investments, or other assets, provides for the legalization of extremely precise instructions for asset transfer upon succession. Transferring ownership of all assets held by a single organization is cost-effective and tax-effective*. It's also less expensive than the time-consuming procedure of transferring ownership of an extensive range of assets separately and individually.
Unless excluded, SPVs and foundations must have a CSP at all times under the new requirements. A CSP is a person who is authorized to supply company services under the ADGM. Functioning as an incorporation operator in linkage with the incorporation of an entity in the ADGM; providing company services to an entity incorporated or registered in the ADGM; acting as a registered office provider to an entity incorporated or registered in the ADGM; providing directors, company secretaries, registered agents, or other offices to an entity incorporated or registered in the ADGM; or providing nomi to an entity incorporated or registered in the ADGM are all examples of "provision of company services."
If an SPV is a subsidiary undertaking of any of the following, it will be excluded from the requirement to appoint a CSP:
a person exempt from the requirement to obtain a license to a controlled activity in or from the ADGM; a person authorized to conduct a regulated activity in the ADGM; a person licensed or regulated by the UAE Central Bank; a corporation whose stocks are owned up to trading on a market system in the UAE (including the ADGM); or a business that has demonstrated to the satisfaction of the Registrar an adequate presence in the UAE, taking into account (among other things). The new legislative framework includes a slew of regulations that must be followed by CSPs of non-exempted SPVs and non-exempted charities. CSPs, in particular, are required to keep identical records as SPVs and foundations (i.e., the company's books). Unless the Registrar expressly permits an alternative registered office, CSPs must also function as a registered agent operator to those SPVs and foundations.
CSPs are now legally authorized to manage SPVs and foundations in contact with the Registrar. As a result, under the ADGM Companies Regulations 2020, Commercial Licensing Regulations 2015, and Beneficial Ownership and Control Regulations 2018, CSPs are required to make all filings on behalf of SPVs and foundations. In response, SPVs and foundations must make all necessary documentation and information available to their CSPs for the CSP to meet its regulatory duties. Furthermore, CSPs that manage client accounts must adhere to regulatory rules governing client money payments, segregation, and withdrawals.
The addition of specific criteria and requirements for CSPs in the ADGM, which follow international best practices and aim to create a solid framework for the functioning of SPVs and foundations in the ADGM, is a positive step forward. The new legal framework intends to address the problems and reduce any risks that posed to the ADGM as a result of increased global demand for ADGM-based SPVs, which has led to the emergence of entities in the ADGM that have no direct relationship to the ADGM or the UAE.
The new laws will also provide the ADGM Registration Authority with information on the extent to which nominee structures, which are extensively used for making investments in the GCC, are employed through the ADGM. Although the new laws will not immediately impact the ADGM's investment climate, future revisions to the legislation may be made depending on the ADGM's long-term objectives. It needs to be seen whether the additional layer of regulation and the costs connected with it would deter or encourage the use of SPVs or foundations in the ADGM.