Special Purpose Vehicle (SPV)

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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:

  • Asset securitization
  • Obtaining funds
  • Reducing hazards
  • Taking on ambitious undertakings
  • Encouraging collaborations
  • Getting access to tax benefits
  • 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
  • Financial risk that is isolated
  • Direct possession of a certain asset Tax benefits, if the vehicle is established in a tax haven like the Cayman Islands
  • The vehicle is simple to construct and configure
  • Drawbacks:
  • reduced vehicle-level access to funding (since it lacks the sponsor’s credit).
  • If an asset is sold, Mark to Market accounting rules may be activated, which would have a substantial effect on the sponsor’s balance sheet.
  • Companies that use these vehicles may face major issues as a result of regulatory changes.
  • There are instances when the perception of SPVs is bad.
  • 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!

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