ADGM: special purpose vehicles should have connection to UAE or GCC

Out-Law News | 28 Sep 2020 | 3:18 pm | 1 min. read

The Abu Dhabi Global Market (ADGM) has published guidance for special purpose vehicles (SPV) stipulating that those incorporated in the financial free zone must have some connection to the United Arab Emirates (UAE) or Gulf Cooperation Council (GCC).

The ‘nexus’ requirement means that applicants to set up an SPV will have to provide documentary evidence of its connection to the region.

In its guidance note (6 page / 503KB PDF) the ADGM said examples of how the nexus could be demonstrated included where the SPV was owned or controlled by a UAE or GCC-based private company, family, family office or individual. The connection would also be present if the SPV held assets located in the UAE or the GCC region, or if it facilitated transactions connected to, or providing real or economic benefit, to the UAE.

Applicants would also be able to prove a connection if the purpose of the SPV included the issuances of securities that would be admitted to the official list maintained by the Financial Service Regulatory Authority (FSRA), or admitted to trading on a recognised investment exchange or another licensed platform established in the ADGM.

UAE sovereign and state-owned entities will satisfy the conditions of the nexus requirement. However, an SPV wholly owned by a foreign non-resident person with assets located solely outside the region would not.

The ADGM said applications would be decided on a case-by-case basis, but the registrar was unlikely to accept an application to establish an SPV if it did not meet the nexus requirement.

Corporate law expert Mohammad Tbaishat of Pinsent Masons, the law firm behind Out-Law, said: “The ADGM has positioned itself as an alternative to the typical offshore jurisdictions. The requirement to have a ‘nexus’ to the ADGM or GCC will narrow the pool of prospective clients.”

Tbaishat said the guidance could potentially make it easier for ADGM companies to demonstrate economic substance as required by economic substance regulations. The UAE introduced economic substance rules in April 2019, requiring entities established in the jurisdiction to demonstrate that they carry out substantial economic activities there.

Firms were required to notify their regulators if they were carrying out relevant economic activities, with the deadline for notification extended to 30 June.