UAE SPVs, Foundations
and Trusts

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UAE SPVS, Foundations, and Trusts are three different legal entities having different legal structures. But when it comes to holding and protecting assets and legacy planning, they all play a similar role. Here’s all you need to know about the three different types of entities in the UAE.

SPVs

A Special Purpose Vehicle (SPV) is a separate legal entity created to fulfil a temporary business purpose or undertake a limited and specific business activity. It is a bankruptcy-resistant entity deemed isolated if the parent firm goes insolvent and bankrupt, this is done by ring-fencing certain assets and liabilities.

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An SPV has a separate legal status, assets, and liability structure, and maintains a separate balance sheet from that of the parent company. SPVs could be used to fund, purchase, and sell stock held on the off-balance sheet to limit responsibility and isolate financial risk.

It is considered a strong dynamic and cost-effective asset holding and investing structure. An SPV provides more freedom to business owners and asset owners while also separating financial and legal risks.


Risk Sharing

A parent company can create an SPV to allocate its projects involving high risks. An SPV allows a company to separate legal and financial risks. SPVs are frequently used to create project companies for joint ventures, as they reflect management tasks while isolating the joint venture partner’s risks.


Financing

An SPV could be used to raise funds without adding to the parent company’s debt or exposing the parent’s assets to cross-liabilities. It also allows investors to invest in specific initiatives directly instead of the parent company.


Securitization

Companies frequently use SPVs to securitize loans or other receivables. Through securitization companies reduce their funding costs. SPVs can also be used to buy properties in the real estate market.


Intellectual Property Rights

An SPV protects the intellectual property right of the companies from the pre-existing licensing deal. It helps separate valuable intellectual property through a separate structure with minimum liabilities.


Asset Transfer

An SPV can be used to transfer assets. Once the assets are transferred to the SPV, they become unidentifiable. Because some assets are difficult to transfer (for example, mine, power plants, gas plants, etc.) a parent company may establish an SPV to hold these assets. When they want to sell the asset, they sell the SPV as a standalone package.


Raising Capital

An SPV may be able to obtain favorable borrowing rates when raising capital. Since the SPV owns the underlying assets, it may have a better credit rating than the parent company.

Foundations

Foundations combine characteristics of trusts and corporations where assets are managed by directors (like that of a trustee). Foundations are legal entities with perpetual existence, meaning they can be used for a wide range of investments. Foundations have a great use as a means for private family wealth, offices and succession planning and also offer excellent asset protection.

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A foundation gets established when a founder (the person who provides the assets) registers the foundations charter at the public registry. As a legal entity, it can sue or be sued, enter into contracts and agreements with individuals and companies, open bank accounts, and engage in commercial activities. It holds the legal titles to all assets held in the foundation.

  • Asset Protection

    As an independent legal entity, foundations separate individuals from the ownership of assets. This provides protection from creditors and government bodies if the founder gets into financial difficulties.

  • Employee Schemes

    Foundations can manage employee pension and retirement plans, as well as company share schemes.

  • Tax-efficient Holdings
    Foundations can hold capital income and certain assets. This is tax-efficient, as they are not subject to personal or corporate taxation.
  • Philanthropy

    Founders can set up by-laws to ensure assets are used for charitable purposes.

  • Wealth Structuring and Inter-Generational Legacy Planning

    By-laws can be created to establish how wealth is distributed from one family member to another.

Dubai International Financial
Centre (DIFC)

DIFC is the only regime in the UAE that allows a company to be converted into a foundation, have charitable purposes and can own real estate.

Abu Dhabi Global Market
(ADGM)

  • Foundations here must maintain accounting records, can own real estate and benefit from private arbitration of disputes.
  • All applications must be submitted by an ADGM CSP.

RAK International Corporate Centre
(RAK ICC)

  • RAK ICC appeals to clients requiring complete anonymity as the only regime where information is not publicly accessible unless required by relevant authorities.
  • Certain entities can own properties in Dubai. There is no requirement to file or audit accounts or tax returns. Migrating a foundation from overseas is possible and there is perpetual concept.
They all require
  • one founder, who may be an individual or a legal entity
  • at least two council members
  • a mandatory guardian if the foundation has charitable or specified purposes
  • must maintain a registered office in the UAE.

All three regimes benefit from the UAE’s political stability and enjoy legal systems largely based on English law, although there are small variations between them. Corporate tax is 0% in all three. All offer flexibility and access to a comprehensive network of tax treaties.

There are three main forms of foundations:
Charitable Foundation

It is set up for the sole purpose of approved charitable causes or charitable organisations, which must be specified in the main foundations charter.

Private Foundation

Also called as Private Interest Foundations, they are used for personal asset protection and succession planning instead of a will.

Corporate Foundation

It is used by corporations to manage employee-based schemes like pension plans, retirement plans, etc.

Trusts

A trust is a relationship between three entities, known as the settlor (the individual who creates the trust), the trustee (the individual in charge of the trust) and the beneficiary (the individual who gets benefit from the trust).

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A trust is not a legal entity in its own right. Therefore, it cannot be sued or take any legal action. The legal ownership of the trust sits with the trustees, while the beneficial ownership lies with the beneficiaries.

In the UAE, trusts are not subject to income tax. The location of the settlor – or contributors – to the trusts become especially important for tax purposes is if they reside in a taxable jurisdiction. Best case scenario in the UAE is to have a UAE national or UAE-formed corporations to guarantee that the trusts can continue to earn income and accrue capital without being subject to taxation.

Trustees have a fiduciary duty to the beneficiaries but must respect the settlor which are usually set out in the trusts instrument. Trusts will also appoint a protector with the power to advise or replace trustees.

Many jurisdictions have integrated the 21-year rule however not the UAE. ADGM and DIFC foundations have a perpetual existence, which means they will last until wound up by the administrators, even after the death of the founder.

The trust is established when the settlor prepares a trust deed – a Deed of Trust or Declaration of Trust, and transfers assets to the trustee for the benefit of the beneficiary. The assets must be transferred to the trusts immediately for it to be valid.

The two most common types of trusts are:


Charitable Trust

This is a trust created for charitable purposes only. For e.g., the advancement of education, promotion of public health, or any other purpose regarded as charitable in law.


Discretionary Trust

This is a trust in which the settlor gives the trustee full discretion to decide which beneficiaries are to receive either the income or the capital of the trust and when.

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