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Is it your goal to get full control of your Dubai mainland business as a foreign national entrepreneur? How is this feasible when UAE law mandates that you form a partnership with a local sponsor who would control 51 percent of the shares in your limited liability company? As a result, special purpose vehicles (SPV) or special purpose corporations (SPCs) are used to restructure businesses in order to achieve their goals.

Special Purpose Vehicles in UAE

Dubai is well-known across the world as the business capital of the Middle East. Dubai is the destination of choice for entrepreneurs from all over the globe looking to either establish their own businesses or extend their current businesses into a new area. With the flexibility to establish your company on either the mainland or in one of the many free zones in Dubai, there is no shortage of possibilities for you to explore the UAE market and to benefit from the country’s strong worldwide image.

The current legal framework for mainland corporations

Foreign nationals are permitted to establish a Limited Liability Company (LLC) in mainland Dubai, provided that they do so as a partnership in accordance with the legal business structures prescribed by the UAE government. The establishment of a mainland business in Dubai requires the collaboration of a local sponsor. An Emirati national person (Emirati) or a business wholly owned by an Emirati is required to act as a local sponsor under UAE law by definition. According to UAE commercial law, the local sponsor must possess 51 percent of your company’s shares, with the remaining 49 percent being owned by you and any other foreign national partners in your firm. In the majority of instances, the UAE national is a silent partner in your business, with no operational control over your operations. Legally, however, both parties are responsible up to the amount of the firm’s stated share capital that each shareholder owns in the business.

A side agreement between a foreign investor and a local sponsor is often reached in the course of business. This agreement serves as a written permission in which the UAE citizen proclaims himself or herself to be a silent partner in the business, with no ownership interest in the company’s stock. This, on the other hand, is not a notarized agreement. The agreement’s validity is being challenged in a civil action. It will not take the place of a legally notarized Memorandum of Association (MoA), which is required by UAE company legislation to be in place.

A side agreement is built on trust and goodwill, but should the scenario occur when a disagreement necessitates the involvement of the legal system, the government will only examine those provisions of the agreement that are specified by law. To protect the ownership of the foreign investor, it is necessary to reorganise the business by creating the presence of a Special Purpose Vehicle (SPV) in the company’s operations (SPV).

What exactly are Special Purpose Vehicles (SPVs)?

Special Purpose Vehicles (SPVs) are subsidiary businesses that have been formed to assist you in acquiring full ownership of your mainland LLC company (see below). If you are a high-net-worth entity or a business with significant investment and high-risk activities, you may have concerns about registering your company with an ownership structure that is 51 percent locally controlled. As a result, the formation of an SPV is the most appropriate solution for their requirements since it will provide them with full control over their company without the need to adhere to a shareholder structure.

Recent amendments to the UAE’s Foreign Direct Investment (FDI) legislation by the UAE Federal Government have broadened the range of activities in which foreign citizens may control 100 percent of a limited liability company (LLC). However, despite the fact that they have added more than 122 activities to the list, the vast majority of them are linked to service companies, construction enterprises, or project-oriented businesses. Because the initial expenditure needed for these operations is very expensive, they are not a feasible choice for small and medium-sized enterprises (SMEs). Company reorganisation via the use of an SPV will be a more cost-effective option.

In order to be incorporated, special purpose corporations must be registered in an area governed by English Common Law. Presently, the United Arab Emirates (UAE) has just two free zones that allow for the formation of companies under common law – the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).

What is the procedure for restructuring a company via the use of a special purpose vehicle?

It takes two stages to restructure an LLC, and each step requires the participation of both parties – the UAE national sponsor and the expat partner (s).

Stage 1 – Restructuring of a company in a free zone

Registration of one or two distinct entities as Special Purpose Vehicles (SPVs) or Special Purpose Companies (SPCs) is required at this stage (SPC).

One SPV is used while incorporating a company.

The SPV will be established as a UAE national-owned corporation with a 100 percent stake in the company.
Afterwards, the registered SPV may pledge all of its shares to any person or group of individuals who would immediately become the shareholder(s) of the mainland LLC business, thus completing the transaction. As a result of the Call Option Agreement, which is governed by English Common Law, this transfer of shares is completed.
When combining two special purpose vehicles (SPVs),

In the initial instance, the business will be known as SPV A and will be registered as a 100 percent UAE-owned corporation.
The second business, known as SPV B, will be registered as a 100 percent foreign-owned corporation with the expat partner(s) as the only shareholder.

If both companies are registered with the appropriate government agency, SPV A will commit all of its shares to SPV B in accordance with the Call Option.

Stage 2 – Establishment of a new business on the UAE mainland

It is the last stage in the process of reorganising your business that you establish a new limited liability corporation (LLC) on the mainland. According to the UAE Commercial Law, this business will have two shareholders: an Emirati-owned SPV and a foreign national person or an expat-owned SPV, which will be the majority shareholder. Because Emirati-owned shares were pledged off in Stage 1, the LLC is now held entirely by the expat investor(s) and no longer has any Emirati-owned shares.

What are the criteria for establishing a Special Purpose Vehicle (SPV) into your business?

The papers that are needed are determined by the reason for why the business is undertaking a restructuring process. However, the following are the fundamental requirements:

The business plan of the firm, which includes the organization’s mission and vision statements.
Each shareholder’s passport information must be provided in writing.
Copy of UAE visa page for shareholders who are UAE citizens or permanent residents.
Non-resident shareholders’ copy of their UAE visit visa page is required.
Shareholders who live in the United Arab Emirates must provide a copy of their Emirates ID.