Offshore companies can still serve special purposes

NM-Law-Blog-OFFSHORE-COMPANIES-CAN-STILL-SERVE-SPECIAL-PURPOSES

Given the recent “leaks” that have dominated headlines regarding offshore accounts, it comes as no surprise when clients stipulate that they want nothing to do with an offshore company formation. In point of fact, the function of special purpose vehicles (SPVs) to create a separate platform of assets for a specific activity is one of the primary reasons for off shore company formation.

And remains critical to this day in the complex world of business.

The DIFC has created a platform for these “off balance sheet” vehicles in a transparent and cost-effective manner. These fall under the ambit of common law jurisdiction under the DFSA, and companies do not need to file their accounts annually. Nor do shareholders have to be based physically within the DIFC itself.

“Corporate Service Providers” can act as directors and company secretary on behalf of the shareholders (similar to the practice of international offshore jurisdictions). And the cost of incorporating the company is far more economical ($1,000) than is the case internationally with minimum capital requirements of as low as $100.

Incorporation of a SPV takes place under DIFC Law Number 2 of 2017, with the entire formation process being done through electronic submission. A similarly transparent and hassle-free process is at the ADGM (Abu Dhabi Global Marketplace), where it is referred to as “Restricted Scope Company”.

There is no minimum capital requirement, nor is there any ceiling on the number of investors, which is crucial in certain cases. In the case of winding up these structures, a declaration is required by the shareholders that there are no outstanding liabilities, and once approved by the regulator, is declared publicly via the online registrar.

It is worth noting that the purpose of operating business within these structures are defined clearly and are referred to as “exempt activities”; firms that are found to be operating outside the scope of such said activities will incur a fine.

Despite the recent bad press, the level of formation and business flows that occur through these SPVs has only increased with forecasts indicating continuing growth rates in the years to come. This is because these structures play an integral role in the raising of finance (especially for infrastructure and real estate projects), without costs that accrue from changing the shareholding of the parent company.

Furthermore, it provides an effective platform to ring fence assets, thereby allowing the shareholders to pursue specific activities. And even monetise intellectual property assets where the case may arise.

In many listed companies, these structures are often set up, effectively as subsidiaries though not having the legal definition of one as such to raise third-party funds which are then earmarked for specific activities and not co-mingled with the rest of the balance sheet.

It is true these structures have also been deployed for activities that have been unscrupulous at times, but this has in no way been the majority of cases. As recent practices within the DIFC and the ADGM get implemented, the use of such structures for illegal purposes has become increasingly difficult.

The pivotal advantage in using these jurisdictions has been the common law framework, which gives international investors the comfort and the access to a global investment platform using a legal framework that is easily accessible.

While investors are advised to seek legal assistance in their bespoke needs for SPV creation, we have seen continued interest in SPV formation activity. In point of fact, the number of inquires relating to SPV formation in DIFC and ADGM have steadily increased through the last two years, holding assets from real estate to infrastructure and intellectual property.

This highlights yet again the fact that the UAE’s proactive approach to company formation law continues to bear fruit with international investors.

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