05 Feb 2017

Intermediate Special Purpose Vehicles in the Dubai International Financial Centre

Authored by: Ahmad Sergieh and Adele O’Herlihy

Intermediate Special Purpose Vehicles in the Dubai International Financial Centre

In Brief

  • Considers the new Intermediate Special Purpose Vehicles introduced in late 2016 and their potential impact on the options for structuring investments
  • Looks at a number of the key benefits of this new SPV to investors and the market
  • Identifies the criteria to be a ‘Qualifying Applicant” under the new regime

Background

Intermediate Special Purpose Vehicles (“Intermediate SPVs”) were introduced in the Dubai International Financial Centre (“DIFC”) by the DIFC Authority on 19 September 2016, with immediate effect.

We understand that a number of amendments to the DIFC Companies Law and the DIFC Companies Regulations are currently being considered, including amendments in relation to Intermediate SPVs. In the interim, investors are entitled to benefit immediately from the Intermediate SPV regime by way of waiver and an amendment of the relevant Companies Regulations and the DIFC Operating Regulations, where applicable.

Intermediate SPVs are only available for entities that already have a substantive presence in the DIFC, which therefore requires the applicant to already be licensed or incorporated in the DIFC and have a physical presence in the DIFC. The regime applies to both regulated and non-regulated entities. Intermediate SPVs can be established as either companies limited by shares or limited liability companies.

The new regime is intended to satisfy the structuring requirements of group companies, particularly in relation to downstream investment. It should complement the existing DIFC Special Purpose Company (“SPC”) regime, which is applies to structured finance transactions.

The key purpose of the regime is to encourage group companies established in the DIFC (in particular, holding companies) to also use the DIFC to establish intermediate holding companies. This will enable the DIFC Authority to realise additional fees by enabling existing companies to establish subsidiary companies at a significantly reduced cost without being required to lease office space (as discussed below).

Qualifying Applicants

As noted above, Intermediate SPVs are only available for entities that already have a substantive presence in the DIFC.

Presently, to be an eligible applicant under the Intermediate SPV regime (“Qualifying Applicant”), an entity must fall within one of the following categories:

  1. Collective investment schemes established in the DIFC and regulated by the Dubai Financial Services Authority (“DFSA”);
  1. Collective investment schemes established outside the DIFC but managed by a fund manager or asset manager that is regulated by the DFSA; or
  1. Holding companies or other holding entities, single family offices, or proprietary investment vehicles with a presence in the DIFC.

A Qualifying Applicant must demonstrate control or ownership of the proposed Intermediate SPV.

Activity

The Intermediate SPV will be licensed as an intermediate holding company, which is described as a firm holding or investing in assets as an intermediary vehicle for a Qualifying Applicant.

Key Benefits

The process to incorporate an Intermediate SPV should be more time- and cost-efficient than the process followed by the Qualifying Applicant. The application process is relatively straightforward, as it primarily requires a simplified business plan and a prescribed DIFC application form to be submitted to the DIFC Authority. This is because the Qualifying Applicant is already subject to substantial regulatory scrutiny by the DIFC Authority.

Applicants are required to have an existing presence in the DIFC but are not required to enter into new leases or obtain additional office space for the new Intermediate SPV. This constitutes a key advantage of the SPV regime as the Intermediate SPV will share office space with the Qualifying Applicant, giving rise to no additional property cost.

Where an applicant is seeking to apply for more than one Intermediate SPV, separate application forms are required but one consolidated simplified business plan will suffice provided the Intermediate SPVs concerned form part of a single overall investment structure.

The application fee to establish an SPV is USD1,000 and the annual licensing fee is USD3,000. This is considerably less than for other DIFC companies, such as the Qualifying Applicant, which carry an application fee of USD8,000 and an annual licensing fee of USD12,000.

Existing SPCs require a corporate service provider which is registered in the DIFC and, therefore, SPCs do not technically lease physical office space in the DIFC. As a result, SPCs are generally unable to obtain Tax Residency Certificates in the UAE. SPCs are only used in structured finance transactions, whereas Intermediate SPVs would be licensed as an intermediate holding company. Intermediate SPVs can only be implemented on the basis that they co-lease office space in the DIFC without having to use a corporate service provider. On that basis, intermediate SPVs may be able to meet the minimum substance requirement and obtain a Tax Residency Certificate from the UAE Ministry of Finance in order to benefit from double taxation treaties entered into by the UAE with a number of countries worldwide. This would be a significant benefit over existing SPVs, however, it will require confirmation by the Ministry of Finance.

Conclusion

The new Intermediate SPV regime provides another option for structuring investments, in particular where structured finance is not the main driver. It is expected to be of most interest to private equity houses, funds, family offices, investment companies and other corporate groups with an existing presence in the DIFC.  The increasing availability of different corporate vehicles serves to further strengthen the DIFC’s reputation as an attractive business location and ensures it continues to compete favourably at a global level.

 
 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.