Special Purpose Vehicles, or SPVs, are dedicated, independent entities created for very specific projects, which for all intents and purposes are considered separate from its parent company. This separation is crucial, acting as a financial barrier that protects the parent company from potential fallout should the SPV go bankrupt. This safety net of sorts allows businesses to innovate and experiment with new ventures without jeopardizing their core operations. SPVs are versatile, and can be structured as partnerships, joint ventures, or private limited companies, especially common in financial hubs like Hong Kong.
What are SPVs Used For?
SPVs are incredibly versatile, serving a range of strategic functions used by banks and corporations of all sizes:
- Risk Mitigation and Isolation: SPVs can shield a parent company from financial fallout of specific projects or assets by containing potential negative consequences within the SPV.
- Enhanced Securitization: SPVs are commonly used by investment banks, funds, and family offices to pool assets.
- Streamlined Asset Transfer: Parent companies can simplify the transfer of complex assets like properties by selling or transferring the SPV itself and including the assets it holds.
- Efficient Property Transactions: SPVs can also offer significant tax efficiencies and smoother ownership transfers of properties by selling the SPV that holds the property instead of the property itself, allowing owners to pay the lower stamp duty on stock transactions rather than the property tax, see Fig. 1. SPVs or LLCs are commonly used by local and overseas owners to hold Hong Kong property for this exact purpose.
Venture Capitalists and corporations in the finance and property space in Hong Kong have traditionally used SPVs to make highly-leveraged investments in Mainland China’s market without risking the parent company. This was partly due to how quickly and suddenly policy changes can happen, giving investors some sense of safety should their investments be affected by external factors.
Hong Kong factory owners have also commonly utilised the separation offered by SPVs to start WFOEs on the Mainland to take advantage of the Double Taxation Avoidance Agreements while protecting their home company should their venture not pan out down the line.
The Benefits: When SPVs are the Smart Move
The isolated nature of SPVs brings with it several advantages such as:
- Financial Risk Isolation: SPVs can protect the parent company’s core business and assets from the volatility associated with risky projects.
- Simplified Ownership of Specific Assets: Provides clear separation of groups of assets, simplifying their sale and transfer.
- Potential Tax Savings: SPVs can be structured to leverage favorable tax policies, especially with assets such as property. As an extra benefit, SPVs in Hong Kong are also subject to the low corporate tax rate and can avoid double taxation in cross-border remittances. Withholding taxes paid with SPVs can be as low as 5%, compared to the standard of 10%.
- Ease of Creation and Setup: SPVs are fundamentally a standard company, which in Hong Kong can be incorporated in under 2 business days.
- Improved Access to Investor Capital: By isolating a project, SPVs can reassure and attract specialized investors, potentially securing more favorable funding terms.
- Cross-Border Market Access: A Hong Kong SPV can serve as a strategic gateway to the Mainland Chinese market.
The Risks: What to Watch Out For with SPVs
While versatile, SPVs are not without their considerations:
- Accounting Implications: Selling assets to an SPV can sometimes trigger “Mark-to-Market” accounting rules, where assets could have lower valuations than originally.
- Increased Scrutiny from Banks: While SPVs may be more attractive to investors, banks may not view the credit-worthiness of the SPV the same way as its parent, given its lack of business history. Banks may require additional business proof and plans from SPVs to open accounts or approve loans.
- Negative Perception: Historically, some SPVs have been used by certain investment firms to facilitate some unscrupulous financial activities that led to events such as the 2008 financial crisis, leading to public skepticism and increased scrutiny from the government.
- Regulatory Changes: Heightened scrutiny from the government has led to tight regulations that must be carefully followed at all times as it evolves. These ever-changing financial regulations can significantly impact SPV operations, while deviating from these regulations can lead to steep penalties.
How to Create an SPV
At the structural level, SPVs are no different from a standard company, and the incorporation process to create one is no different.
Incorporating an SPV in Hong Kong will typically run you US$1,500 in addition to supporting information you will be required to submit. This information includes HKID or passport details of you and any other directors and shareholders, the correspondence addresses of all founding members and directors, and the English and/or Chinese name of the new SPV. You will also be asked to specify the structure of the SPV, with most applicants opting to create a limited company. Once all the information has been submitted to the Companies Registry or incorporation service, it will typically take 1-2 business days to receive your business registration. The Companies Registry also has an online registration available.
| SPV Application Preparation | |
| Cost | US$1,500 |
| Processing Time | 1-2 business days |
| Required Information |
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Summary
Special Purpose Vehicles are powerful tools that enable companies to experiment with new ventures at reduced risk. Their nature as an independent company means that any liabilities it incurs will be contained, and any assets held under its name can be transferred together in one fell swoop.
While there are obvious benefits to the isolation of an SPV such as simpler transfer of complex assets and financial protection, there are also risks and a great potential for misuse, particularly when it involves pooling investor money and spreading risk. Used correctly and within regulations however, SPVs can be invaluable to a company’s innovations and growth.
If you have more questions about SPVs not covered in this article, or would like assistance in creating one, get in touch with us so we can help!
