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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions