Why Set Up A Special Purpose Vehicle In Hong Kong

A Special Purpose Vehicle, also known as an ‘SPV' or ‘SPE' (Special Purpose Entity), is a subsidiary company established by a parent company, often created in furtherance of isolating financial risk.

To put it simply, an SPV acts as a separate legal entity created with its own assets, liabilities, and legal status.

This means that the SPV's financial performance, such as its profits and debts, are not consolidated with the parent company's balance sheet.

Hence, with a separate legal status from the parent company, if the parent company goes bankrupt or faces insolvency, the SPV that acts as a backup can still continue to operate.

This is why SPVs are oftentimes also referred to as ‘bankruptcy-remote entities.'

However, SPVs are not only there to isolate financial risk and conduct separate financial transactions. They are more than meets the eye.

Some More Functions SPVs Are Used For 

Asset Transfer

SPVs are useful for transferring specific assets, like real estate, equipment, or entire business divisions, from a parent company.

It can simplify ownership by placing specific assets under the SPV for easier management or sale.

Additionally, SPVs can be used to separate assets with different risk levels or depreciation schedules, keeping the parent company's core finances more straightforward.

Property Sale

By using an SPV to hold a property, companies can improve tax benefits from the sale or make the sale process simpler.

This is particularly helpful for dealing with multiple properties or complicated ownership setups.

Risk Sharing

The parent company can set up an SPV to manage the project and its risks.

This enables the parent company to bring in external investors who share potential rewards while reducing the parent's financial risk if the project fails.

The SPV operates independently, handling the project's finances and protecting the parent company's main operations.

Securitization

An SPV can help with securitization, which involves turning financial assets (like loans, mortgages, or future revenue) into tradable securities (like bonds). Here's how it works:

The parent company transfers a bunch of assets, often the risky ones, to the SPV.

The SPV then groups these assets into different categories (tranches) and sells them to investors—each category suits specific credit risk preferences.

These tranches, or asset groups, have different levels of risk and return.

Investors willing to take more risk can buy tranches with higher returns but a greater chance of default.

Those who want less risk can buy tranches with lower returns but a higher chance of getting paid back.

By doing this, the parent company can raise money, improve liquidity, and manage its risk.

Joint Ventures

SPVs are commonly used to organize joint ventures involving multiple companies. In this setup, the SPV serves as a neutral entity co-owned by the partnering companies.

This arrangement promotes collaboration by offering a platform for joint ownership and decision-making.

Moreover, the SPV handles the venture's finances autonomously, promoting transparency and accountability among the partners.

Intellectual Property Holding

Companies can use SPVs to hold intellectual property like patents, trademarks, or copyrights. This can provide strategic benefits.

For example, separating valuable IP from the main business can provide protection in legal disputes or establish a separate entity for licensing or selling the intellectual property.

Benefits and Risks of SPVs

Although, until now, SPVs might seem too good to be true, there are some downfalls too.

Here is a list of the pros and cons of SPVs:

Pros 

An SPV's liabilities are separate from the parent company's, potentially protecting the parent company from significant risks associated with the SPV's activities.

The SPV helps the parent company get financing by bringing in independent equity investors help purchase its debt obligations.

Additionally, SPVs can be structured to take advantage of favorable tax laws in certain jurisdictions.

They can also be used to hold specific assets, potentially providing ownership and control benefits.

Also, SPVs are simpler to set up than a new company.

• Isolated Financial Risks (limited losses)
• Tax Savings/Cuts
• Easy to set up 
• Easier Communication and Awareness
• Direct Ownership of certain assets

Cons

Because SPVs are separate legal entities and maintain their own financial statements, these statements may not be consolidated with those of the parent company, complicating investors' ability to grasp the entire economic landscape.

For instance, if an SPV holds assets with high risk, such as risky loans, this risk may not be evident on the parent company's balance sheet.

Consequently, an investor solely analyzing the parent company's financial situation might overlook this risk factor.

Other cons to consider are:

• Additional legal and accounting work
• No Capital Gains Allowance
• Complex financial statements 
• Liability for subsidiary's actions, debts
• SPV abuses

Real-World Example of SPVs

Many bigger corporations have implemented an SPV into their own companies in the hope of securing their own financial assets.

Namely, Warren Buffett's Berkshire Hathaway Inc., for example, owns a set of smaller subsidiaries, including Clayton Homes, Dairy Queen, Business Wire, GEICO, and Helzberg Diamonds.

Some of these subsidiaries might be SPVs used for specific purposes, such as isolating risk associated with a particular business line.

Why Set Up An SPV In Hong Kong

1. Hong Kong Is the Hotspot of Finance

Hong Kong being a Special Administrative Region (SAR) has always been viewed as a rapidly developing city, and this year more than ever we are seeing significant increases in HK's already-booming economic rates.

So what better way to be a part of its economic success than to set up an SPV in HK?

Furthermore, being in close proximity to China also helps Hong Kong become a key financial hub in Asia, becoming especially beneficial if you are looking to do deals with Chinese investors or trying to penetrate the Chinese market.

2. Hong Kong's Strategic Corporate Structure

Secondly, if you are looking to enter the Chinese market, holding an SPV in Hong Kong could be a way to do it.

For instance, if a French company owns an SPV in Hong Kong, in turn, the Hong Kong SPV will own China-based assets being a WFOE (Wholly Foreign-Owned Enterprise).

Thus it will be regarded as an HK company, and due to its also close geographical location with China, it will be easier to partner or link with Chinese firms and investors.

3. Advantageous Tax Laws

Hong Kong is also famous for its favorable corporate tax rates, as well as for its strategic taxation laws.

Most notably, for companies in Hong Kong, a treaty called the ‘double tax agreement' was formed between Mainland China and Hong Kong to help withhold taxes on dividends as well as help prevent double tax and tax evasion.

In turn, it allows companies to achieve higher profits and revenues. 

Additionally, as previously mentioned Hong Kong holds low personal and corporate tax, as there is no capital gains tax, no value-added tax or sale tax, and no withholding tax on dividends or taxation on going to public welfare benefits.

Hence, why Hong Kong remains one of the countries with the lowest tax rates in the world when compared to other countries, which is also reflected by their equally correlating fastly growing corporate world. 

Special Purpose Vehicle Specifications in Hong Kong

Here are a few requirements from the Hong Kong Government if you are looking to set up an SPV in Hong Kong:

• Should have a parent company fully incorporated or registered outside of Hong Kong
• Must be owned fully or partially by a non-resident in Hong Kong
• Cannot engage in business operations, trade, or activities other than holding
• Cannot be registered as an immune or excepted private company
• Is established solely for the purpose of holding, directly or indirectly, and administering one or more excepted private companies

Conclusion

Naturally, setting up an SPV will be a very complex decision to make. It should be evaluated carefully and thoroughly in the best way possible to see whether or not it will benefit your business.

However, it has become apparent over the years that SPVs have become a major development towards securing big corporation assets, and what better way than to set up an SPV in Hong Kong that aligns with promising tax legislation for your company to achieve its greatest heights yet.

For us, it's a no-brainer! 

Are you looking to open your own SPV in Hong Kong?

Register your business with Air Corporate today and get approved in under 48 hours!