13 things you need to know about Special-Purpose Vehicle or SPV
I received enquiries about SPVs lately – what are they? Why do they exist? How are they used for tax planning? And most importantly, how can they be abused?
Let me try to explain in layman’s term using these 13 pointers of SPVs…
1. A special-purpose vehicle or SPV is a legal entity (usually a limited company or, sometimes, a limited partnership ) created to fulfill narrow, specific or temporary objectives.
2. SPVs are typically used by companies to isolate the firm from financial risk.
3. They are also commonly used to hide debt (inflating profits), hide ownership, and obscure relationships between different entities which are in fact related to each other.
4. Normally a company will transfer assets to the SPV for management or use the SPV to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk.
5. SPVs are also commonly used in complex financings to separate different layers of equity infusion. Commonly created and registered in tax havens, SPVs allow tax avoidance strategies unavailable in the home district.
6. A special-purpose vehicle may be owned by one or more other entities.
7. Often it is important that the SPV is not owned by the entity on whose behalf the SPV is being set up (the sponsor). Therefore, many SPVs are set up as ‘orphan’ companies with their shares settled on trust and with professional directors provided by an administration company to ensure that there is no connection with the sponsor.
8. Corporates may use SPVs to legally isolate a high risk project/asset from the parent company and to allow other investors to take a share of the risk.
9. In cases where many permits are required to operate certain assets (such as power plants) are either non-transferable or difficult to transfer. By having an SPV own the asset and all the permits, the SPV can be sold as a self-contained package, rather than attempting to assign over numerous permits.
10. SPV may be used to maintain the secrecy of intellectual property.
11. Some countries have different tax rates for capital gains and gains from property sales. For tax reasons, letting each property be owned by a separate company can be a good thing. These companies can then be sold and bought instead of the actual properties, effectively converting property sale gains into capital gains for tax purposes.
12. Special-purpose vehicles were one of the main tools used by executives at Enron, in order to hide losses and fabricate earnings, resulting in the Enron scandal.
13. They were also used to hide losses and overstate earnings by executives at Towers Financial, which declared bankruptcy in 1994. Several executives of the company were found guilty of securities fraud, served prison sentences, and paid fines.
Hope above helps.
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