United Arab Emirates: The Rise Of DIFC SPCs

Last Updated: 13 May 2016
Article by Conyers

A Special Purpose Company (the SPC) is one type of legal entity that may be incorporated under DIFC law and is similar in some respects to the ordinary DIFC company limited by shares (an "Ltd."). However, SPCs enjoy a number of features which differentiate them from Ltd. companies. The SPC is designed for structured finance transactions.

Establishing in the DIFC

The DIFC is a federal financial free zone with its own legal system, courts and financial services regulatory architecture distinct from that of the wider UAE.

An SPC offers a number of advantages shared by a DIFC Ltd. company. Including:

  • No foreign ownership restrictions. Companies incorporated in the DIFC are not subject to foreign ownership restrictions imposed by UAE Commercial Companies Law.
  • Tax neutral. There are no corporation, transfer, withholding, capital gains, inheritance or other taxes under DIFC corporate law and no stamp duty is payable on the transfer of shares in a DIFC company. Companies incorporated in the DIFC will not be subject to tax for at least 50 years from 2004. This guarantee is renewable.
  • Compatibility with other offshore structures. DIFC companies are routinely and successfully used in complex structures involving entities incorporated in onshore jurisdictions, as well as in leading offshore jurisdictions such as Bermuda, the British Virgin Islands ("BVI") and the Cayman Islands.
  • GCC status. The DIFC may be attractive to parties looking to invest in other GCC's jurisdictions outside of the UAE, who wish to use a jurisdiction that is flexible and operates a sophisticated and versatile body of corporate law
  • UAE national status. A company (including an SPC) that is incorporated in the DIFC and is wholly-owned by UAE nationals is treated as a "national company" for onshore purposes within the UAE.
  • Limited liability of shareholders. The liability of shareholders in an SPC is generally limited to the amount of their commitment to the SPC's share capital.
  • DIFC law and courts. An SPC enjoys being incorporated within the DIFC's internationally-oriented and English speaking regulatory and legal system. DIFC corporate law is largely based on English common law and the DIFC Courts operate a system of binding precedent based on common law. An SPC is also able to avail itself of the DIFC's advanced regime for the registration and enforcement of security interests.

Why choose an SPC?

An SPC is governed by the DIFC Special Purpose Company Regulations of 2008 (the "SPC Regulations"), which contain a number of important exemptions from the residual requirements of the DIFC Companies Law (DIFC law No. 2 of 2009) (the "Companies Law") and the DIFC Companies Regulations. In particular:

  • No requirement to lease physical office space in the DIFC. An SPC is not required to lease and maintain a physical office within the DIFC. Instead, an SPC is required to maintain, within the DIFC, a registered office address, which will typically be the address of the SPC's Corporate Service Provider. This is similar to the registered office requirement in leading offshore jurisdictions.
  • No requirement to maintain, file or audit accounts. An SPC is not required to maintain or audit financial statements or to file any financial statements with the DIFC Registrar of Companies (the "RoC").
  • No requirement to hold an AGM. An SPC is not required to convene an annual shareholder meeting.

Exempt Activities

An SPC is subject to certain restrictions. In particular, the SPC Regulations provide that the purpose of the SPC must be expressly limited to "Exempt Activities" as defined in SPC Regulations:

  • the acquisition, the holding and the disposal of any asset in connection with and for the purpose of a "Transaction";
  • the obtaining of any type of financing, 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 of 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; And
  • any ancillary activities related to the activities mentioned above.

Elements of an SPC

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.

Typically, an SPC is used in a traditional structured finance transaction such as a securitisation, a debt or sukuk issuance or a loan facility. In recent years, however, SPCs have been used in a range of transactions, some of which are essentially corporate acquisition and holding structures, but which have a financing element that serves to classify the structure as a "financing transaction" and thus permits the use of an SPC.

The RoC has become increasingly vigilant in this area. In particular, some applicants are attracted to the SPC because it is exempt from the physical office space requirement applicable to other DIFC entities, but seeks to use the SPC for purposes that are outside the definition of a Transaction under the SPC Regulations. The RoC is required to approve each application to incorporate an SPC. The process involves submitting a "Transaction Description" which the RoC scrutinises to ensure the SPC is being incorporated for a permitted purpose.

Restrictions on an SPC

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 authorised and regulated by the DIFC's regulator, the Dubai Financial Services Authority. 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. 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. If an SPC fails to conform to the restrictions imposed by the SPC Regulations 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 the filing and physical office requirements applicable to ordinary Ltd. companies.

Corporate Services Provider

Another feature of an SPC is the requirement to appoint a licensed Corporate Services Provider (a "CSP").

This article was first published in The Oath, Issue 52, May 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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