How to Start a Special Purpose Vehicle Business in Dubai

How to Start a Special Purpose Vehicle Business in Dubai

Every other company in this catalogue is built to do as much as its licence will allow. A special purpose vehicle is built to do one thing and refuse everything else, and the restriction is not a limitation on it — the restriction is the product. A lender, a co-investor or a buyer asks for the vehicle precisely because it cannot wander. What they are purchasing is the certainty that the asset inside it is not standing behind anybody else's debts, and that the vehicle's own obligations cannot reach back into the group that formed it.

Isolation runs in both directions and both directions are the point. The group that sets the vehicle up wants one project's failure to stay inside that project. The outside party wants the asset it is funding or buying to be unencumbered by the group's other commitments, which it has not examined and does not intend to. A single company that holds one asset, has one purpose and carries no unrelated history satisfies both sides of that at once, which is why the structure is so common and so often misused.

Misused, because the moment a vehicle starts doing other things it stops being one. An entity that holds one building, then takes on a second unrelated asset, then employs a few people to run something, then signs a supply contract, is a small company with a confusing name. The isolation it was formed to provide becomes an argument rather than a fact, and it is argued about at the worst possible moment: when somebody is trying to enforce against it.

Who needs a vehicle rather than a company

Borrowers whose lender insisted. The commonest route onto this line, and the vehicle is usually a condition of the facility rather than an idea the borrower had. The lender wants its security over one asset, held by an entity with no other creditors.

Joint ventures between parties who do not otherwise mix. Two groups putting one project into a jointly owned entity so that the project has its own accounts, its own board and a clean exit, without either side opening its wider affairs to the other.

Single-asset property holdings. One building or one plot in one company, so that it can be sold, mortgaged or inherited as a unit. The sale of the shares and the sale of the asset become nearly the same transaction, which is most of the attraction.

Project and development structures. A development, a construction package or a concession held separately so that the cost, the risk and the funding of that project do not touch anything else the sponsor is doing.

Intellectual property holdings. A name, a mark or an invention held in one entity and licensed to the operating companies that use it, so the asset survives the restructuring of any one of them.

Where this is the wrong purchase. A business that will trade, invoice customers and employ a team needs an operating licence with the right activity, not a vehicle. Somebody who wants to hold a group of subsidiaries together is describing CZ 203 Activities of Holding Companies. And somebody who intends to hold assets for other people as a professional service is describing CZ 365 Trustee, fiduciary and custody services on a fee or contract basis, which is a service sold to clients rather than a structure built for yourself.

CZ 358 — Special Purpose Vehicle

What is actually being created is a company whose constitutional documents say no to almost everything. The purpose clause is the deliverable, and it is drafted narrowly on purpose: the asset it may hold, the borrowing it may incur, the consents it needs before it does anything else. Everything the counterparty is relying on is written there, and nowhere else.

The order of work is what most sponsors get wrong. The licence is not the first step and it is not the hard one.

The last row is the one sponsors skip and the one that decides whether the structure works when it is tested. A vehicle is a company: it has company records to keep, filings to make, a real address and a tax position. An entity that has stopped filing is not a clean asset holder, it is a problem attached to an asset, and discovering that at the point of a sale costs considerably more than maintaining it would have.

What the licence does not cover

A vehicle holds. It does not operate, and five boundaries follow from that.

It does not trade. Buying and selling goods or supplying services to customers is an operating activity with its own licence and its own activity wording, and doing it inside a vehicle defeats the isolation in a single step, because trading creates exactly the trade creditors the structure exists to keep away from the asset.

It does not supply the operating permission for whatever the asset does. A vehicle owning a building is not licensed to run a hotel in it. A vehicle owning an aircraft is not licensed to fly it commercially. The operating permission sits with an operator, and that separation is normally deliberate rather than an oversight.

It does not pool outside money. Taking subscriptions from investors and deploying them is a fund, supervised on its own terms, and the fact that the money goes into a single asset does not change it. A vehicle may have several shareholders who each put in their own capital; it may not sell participations to the public.

It does not hold assets for clients as a business. Acting as a professional holder of other people's assets for a fee is the trustee and custody line, which carries duties and conditions this one does not.

And it does not survive being used for several purposes at once. There is no single moment at which a vehicle ceases to be special-purpose, which is what makes the drift dangerous. The practical discipline is to form a second vehicle rather than extend the first, and to treat any request to add an unrelated asset as a question for the counterparty who required the structure in the first place.

What a vehicle costs to hold, what substance is expected of it and which conditions attach depend on the emirate and the licensing authority, and they differ enough between jurisdictions that the choice belongs against the actual asset and the actual counterparty rather than against a package price. ConsultZone confirms the position for the specific structure before anything is committed.

References

1. Ministry of Economy — company matters, intellectual property and the federal company framework a vehicle is formed inside. Ministry of Economy
2. Dubai Land Department — property records and the holding of real estate assets in Dubai. Dubai Land Department
3. Federal Tax Authority — corporate tax enrolment and filing obligations that continue for the life of the vehicle. Federal Tax Authority
4. UAE Government portal — federal law and the general government information behind company and asset-holding structures. UAE Government portal