Abu Dhabi Global Market (“ADGM”) is one of two financial free zones in the UAE. It has developed its jurisdiction which follows its laws, is separate from mainland UAE, and utilizes international principles of common law in its independent courts. Setting up a non-financial structure in ADGM is very efficient as it is a fully digital process, which only takes up to 10 working days.
Special Purpose Vehicles (“SPV”) typically operate as a holding company/subsidiary with a minimum requirement of one director required. SPVs are not permitted to undertake operational roles or carry out business activities but can engage in passive activities (i.e., holding shares in a company). Additionally, the ability for SPVs to redomicile to other jurisdictions makes them a useful instrument in wealth planning and family succession.
The UAE is an attractive and accessible market for start-ups and innovation in technology. Due to this, SPVs have become an increasingly popular and transparent tool in the creation of a secure corporate structure. This is due to the ability of an SPV to isolate risks from the natural persons who ultimately benefit from this structure. Similarly, they are considered to be at low risk of bankruptcy. This is due to the lack of impact on either parent/subsidiary company if either structure files for bankruptcy or liquidation – as both companies will be protected from insolvency.
SPVs can engage in a range of investments, such as shares, intellectual property rights, and real estate. This is because SPVs have the right to acquire title to real property (on- and off-shore) in the UAE. Beneficial owners of an SPV enable investors to effectively allocate property, and benefit from reduced disclosure and filing requirements as compared to a functioning legal entity.
When setting up an SPV in ADGM, the most common structure selected is a Private Company (limited by shares), which can be held as a passive holding company or a standard private limited company. Typically, share classifications in ADGM are as detailed below:
- Ordinary shares (voting and non-voting)
- Preferential shares
- Redeemable shares
- Others (which include cumulative preference shares, redeemable preference shares, cumulative redeemable preference shares, debentures, and loan stocks).
These shares can be either voting or non-voting shares, with a right to receive dividends. However, the redemption of shares is restricted.
These shares may carry more than one vote per share, and/or priority rights on dividends. This may also mean that preferential shareholders are entitled to interim dividends before other classes of shares. Further, if annual dividends have not been paid yet, preferential shareholders are guaranteed payment of shares before other classes.
These shares can be bought back at either the option of the company or the shareholder. The terms and conditions of redemption can be varied; such as whether profits of the company may be redeemed, or if only newly issued shares can be redeemed. Once redemption takes place, the Registrar of Companies in ADGM should be notified of such changes. Due to the nature of these shares, all companies in ADGM must issue non-redeemable shares if redeemable shares are being issued.
Generally, SPVs and company structures in ADGM are able to vary the terms of each class of shares (such as voting and dividend rights, and first rights to purchase newly issued shares). Terms of shares can be varied by amending the model Articles of Association provided by ADGM, or through the issuance of an ordinary resolution.
Different classes of shares may be used by individuals to retain control, via controlling decision-making. This situation would call for a class of shares to be created which grants certain shareholders more votes per share, or even more dividends per share. This arrangement may also be used to attract investors to a company, through investment in an SPV, from which the operating company can ultimately benefit. This also serves as an effective way for companies to raise capital.
Another example may be the issuance of a non-voting share in an SPV, which may be granted to employees working in the operating company. This provides an incentive for employees to be granted an interest in the performance of the company, without the risk of the loss of control of the founding or managing shareholders, ensuring that voting rights are kept to a few selected individuals.
SPVs are a structure held by several investors, who can all benefit from the dividends generated from the operating company. As ADGM allows for fractional shareholding and several classes of shares to be issued, investors can allocate voting rights and dividends in any way they see fit. This can work as a ‘barrier’, as investors can share the risks passed on by the operating company and separate the company’s financial assets from those of the shareholders of an SPV.
Specifically, in instances where SPVs are held by several investors or other corporate structures, the process of a share transfer from the main operating company would be relatively easy. This would only involve a single transaction, and aids in the flexibility of shareholdings and transfer of assets, as compared to having to transfer shares to several individuals and entities. This can end up being a lengthy process, with stringent requirements in relation to compliance regulations.
The ease of using an ADGM SPV may also result in tax savings if an investor’s shareholdings are all held in a single company, which would be taxable only once. The UAE is a party to a treaty regarding the avoidance of double taxation with most major countries internationally; and no tax is payable on income, savings, and dividends earned in the UAE. Similarly, when SPVs hold real estate, the liability for capital gains tax can be minimized by selling the SPV itself, instead of individually transferring each property once sold. An SPV provides for an efficient instrument to own and manage assets while benefitting from the minimization of tax liability.
In summary, the regime for variation of share classes in the ADGM is broad and enables businesses to carry out operations in ways which they deem fit, with minimal restriction from the operating authority and Registrar. The possibility of fractional shareholding classes gives investors the flexibility to individualize share classes and retain control and share losses and profits.
SPVs in the ADGM are a robust instrument for isolating shareholders from the risks of company liquidation or bankruptcy and can be a cost-effective tool for tax savings. This company is easy to set up, can be registered completely online, and is typically ready to begin owning property, shares, or intellectual property rights within 5 working days of making an application to ADGM, with minimal red tape and regulations.
Elnaggar & Partners