In this blog post, Unicorn Global Solutions Business Setup will explain what Special Purpose Vehicles (SPVs) are, why they’re important, and what they mean for your investment journey. If you’re interested in investing or starting your own business, you might come across the term “SPV” or Special Purpose Vehicle. We’ll also go over their history and legal implications.
What is a Special Purpose Vehicle (SPV)?
A subsidiary created by a parent company to shield itself from financial risks is called a Special Purpose Vehicle, or Special Purpose Entity (SPE). Even in the event that the parent company files for bankruptcy, an SPV’s legal existence guarantees that its obligations be upheld. Due to this characteristic, an SPV is frequently called a “bankruptcy-remote entity.”
Progression of SPVs
They have become much more popular in the last few decades. They have performed a variety of tasks, including:
Special Purpose Vehicle Applications
1. Mitigation of Risk
Businesses frequently engage on ventures that carry a high risk. Corporations can lawfully divide the risks of a project among various investors by using a Special Purpose Vehicle (SPV).
2. Securitization
Securitizing loans is a common application for SPVs. For example, a bank may establish a special purpose vehicle (SPV) to isolate mortgage-backed securities issued from a pool of mortgages from its other liabilities. Mortgage-backed securities investors are allowed to get loan payments ahead of other bank debtors thanks to this arrangement.
3. Management of Assets
There are some assets that are difficult to transfer. As a result, businesses may decide to hold their assets under SPVs. The business can easily sell the SPV as part of a merger and acquisition (M&A) procedure if it becomes necessary to transfer these assets.
4. Tax Efficiency
Companies may create an SPV to own the properties designated for sale if the capital gains from the sale are less than the property sale taxes. As a result, the business can sell the SPV itself rather than selling the properties directly and racking up large tax obligations. Instead of having to pay higher property sale taxes, this method permits taxation on the capital gains from the SPV sale.
Advantages and Drawbacks of Special Purpose Vehicles
Advantages
Drawbacks:
The creation procedure can be streamlined and complete compliance with all regulatory requirements ensured by seeking advice from Unicorn Global Solutions, which specializes in setting up Special Purpose Vehicles (SPVs) in the United Arab Emirates. With our experience, companies and investors can focus on accomplishing their strategic objectives in the UAE’s vibrant business and financial sectors while effortlessly navigating administrative difficulties, saving time and effort.
While you focus on maximizing the advantages of an SPV for your investments and projects, let us take care of the paperwork, structuring, and approvals. Get in touch with us by phone or WhatsApp right now to ensure a hassle-free SPV setup process!
Frequently Asked Questions (FAQs)
An SPV (also called a Special Purpose Entity or SPE) is a separate legal subsidiary created by a parent company. It is used to hold specific assets or undertake specific activities so that the risk is isolated from the parent company.
Companies often use SPVs for:
- Risk mitigation: to segregate the risk of a particular project.
- Securitisation: e.g., when financial institutions isolate a pool of assets (like mortgages) into an SPV.
- Asset management: holding difficult-to-transfer assets via an SPV to facilitate sale or transfer.
- Tax or structuring benefits: in some jurisdictions SPVs can be used for tax efficient structuring (subject to legal/regulatory compliance).
Some of the advantages mentioned:
- Isolation of financial risk from the parent entity.
- Direct ownership of a particular asset or project through the SPV.
- Potential tax benefits (depending on jurisdiction) and simpler setup.
Some of the drawbacks:
- The SPV may have less access to funding or cheaper credit because it may not inherit the parent’s credit profile.
- Accounting rules (such as mark-to-market) may impact the parent’s balance sheet if assets are transferred or sold.
- Regulatory changes may affect the SPV’s benefits or even its viability.
- There may be a perception risk: SPVs have been used in the past for opaque structuring, which can lead to reputational or regulatory risk.
- When a company wants to undertake a high-risk or stand-alone project and shield the parent from liability.
- When securitising assets: e.g., a bank putting mortgages into an SPV for issuance of securities.
- When a company wants to hold certain assets separately to make them easier to sell or transfer (for example via a merger/acquisition).
- When looking for efficient structuring of tax or asset-sale benefits in certain jurisdictions.
