UAE Trusts, Foundations, and SPVs – All You Need to Know
Wednesday August 24, 2022
UAE Foundations, trusts, and SPVs 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.
UAE Foundation Overview: A foundation is an independent legal entity with features similar to both, a corporation and a trust. It originates from civil law. Being a legal entity, just like a corporate, it can enter into contracts, have bank accounts, and be used for wide range of investments. Similar to trust, the foundation offers excellent asset protection since the legal ownership of assets is passed onto the foundation and can be used for efficient estate planning. The foundation has a management body, the Council, but no shareholders.
Establishment of a UAE Foundation: A foundation gets established when a founder (the person who provides the assets) registers the foundation charter at the public registry. Unlike the trust, there is no immediate need to transfer the assets to the foundation for it to become valid.
Different Types of UAE Foundation: There are three main forms of foundation:
Charitable foundation: It is set up for the sole purpose of approved charitable causes or charitable organisations, which must be specified in the main foundation 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.
Legal Status and Powers of a UAE Foundation: A foundation is a legal entity formed by registering the Foundation Charter. 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.
Management of a UAE Foundation: The foundation is managed by a Council that is made up of one or more persons. Foundations must appoint a registered agent and must maintain a registered office in the UAE.
UAE Trust Overview: A trust is a legal relationship between 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).
Establishment of a UAE Trust: 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 trust immediately for it to be valid.
Types of UAE Trusts: The two most common types of trust 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.
Legal Status and Powers of a UAE Trust: 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.
Management of a UAE Trust: The trust may have a protector, but the trustee has overall charge of the assets, as defined by the Deed of Trust.
UAE SPV Overview: A Special Purpose Vehicle (SPV), also known as a Special Purpose Company (SPC) or a Special Purpose Entity (SPE), is a separate legal entity created to fulfil a temporary business purpose or undertake a limited and specific business activity. An SPV is a subsidiary created by a parent company to isolate financial and legal risks by ring-fencing certain assets and liabilities. It is a passive holding company established for the sole purpose of isolating financial risks. It is a bankruptcy-resistant entity deemed isolated if the parent firm goes insolvent and bankrupt.
Legal Status: An SPV has a separate legal status, assets, and liability structure, and maintains a separate balance sheet from that of the parent company. An SPV could be used to fund, purchase, and sell stock held on the off-balance sheet to limit responsibility and isolate financial risk.
SPV framework: 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.
Uses and Benefits of UAE SPVs:
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.
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.
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.
Are you ready to setup a Foundation, a Trust, or an SPV in the UAE?
Our business setup experts at Creative Zone provide all the help and support you need to establish the legal entity you need. Please contact our team to discuss how we can support your plans and offer our full range of services for private clients. Call CZ at 800 LICENCE (5423673) today!