How to Set Up a Hong Kong Special Purpose Vehicle

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

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

Hence holding a separate legal status to the parent company, if in any circumstance the parent company goes bankrupt or faces insolvency, the SPV that acts as a back-up can still continue to operate.

This is why SPV’s are oftentimes also referred to as ‘bankruptcy-remote entities’.

However, rest assured, isolating financial risk is not all SPV’s do.

Here are some more functions SPV’s are used for: 

  1. Asset transfer
    1. Often, permits that are non-transferable or difficult to transfer are required to operate certain assets. Thus, an SPV owning all the permits and assets can be sold as a completely separate entity, rather than attempting to sell each permit individually. 
    2. In other words, instead of trying to sell each permit singly, you can transfer it all into an SPV, and sell the SPV as a whole.
  2. Property Sale
    1. Each country has their individual tax rates for capital gains from property taxes. However, one thing is certain, sharing properties among companies can significantly reduce the tax rate. Accordingly, these companies can then be sold and bought as independent entities in charge of these property assets, therefore changing property sales into capital gains all in an effort to pay less tax.
  3. Risk Sharing
    1. Companies may decide to incorporate an SPV into their parent company in order to isolate a high-risk project or asset from the parent company, therefore encouraging other outside investors to take a share of the now less risky project/asset.

Benefits and Risks of SPV’s?

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

Here is a list of the pros and cons of SPV’s:

Pros Cons
  • Isolated Financial Risks (limited losses)
  • Tax Savings/Cuts
  • Easy to set up 
  • Easier Communication and Awareness
  • Direct Ownership of certain assets
  • Additional legal and accounting work
  • No Capital Gains Allowance
  • Complex financial statements 
  • Liability for subsidiary’s actions, debts
  • SPV abuses

Real-World Example of SPV’s:

Many bigger corporations have implemented an SPV into their own companies in the hope to secure 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.

The purpose of this is that by dividing their assets among subsidiaries they have succeeded in sharing the company’s risk and therefore taken off pressure from the big corporation if in any case, it was likely to go under administration. 

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 than to be a part of its economic success, and set up an SPV in HK!

Furthermore, being in close proximity with 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 a 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, allowing companies to achieve a higher profit and revenue. 

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:

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

Conclusion

Naturally, deciding to set up an SPV will be a very complex decision to make, and 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 SPV’s have become a major development towards securing big corporation assets, and what better way than to set up an SPV in Hong Kong which 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!

 

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