What is an SPV and how can it be useful?
A Special Purpose Vehicle (SPV) is a legal entity created for a specific purpose or project. The purpose of an SPV is to isolate the risks associated with a particular project or asset from the rest of the parent company, allowing the parent company to protect its assets and creditworthiness while still participating in the project or investing in the asset. In addition, the SPV can be structured in such a way as to minimize the tax burden on the investors and the project.
One of the most common uses of an SPV is in the field of project finance. In project finance, an SPV is established to hold and manage the assets and liabilities associated with a specific project, such as a power plant or a toll road. Another use of an SPV is in the field of structured finance. In structured finance, an SPV is established to hold and manage a portfolio of assets, such as mortgages or other types of loans. The purpose of an SPV in structured finance is to create securities that can be sold to investors. By issuing these securities, the SPV can raise capital and provide liquidity to the underlying assets.
An SPV is also used in the field of real estate development. Real estate developers often establish an SPV to hold the property they are developing. This allows the developer to raise capital from investors while protecting their personal assets from the risks associated with the development project. An SPV can also be used as a vehicle for private equity and hedge funds investment.
Despite their usefulness, SPVs can also be used for illegal activities and tax evasion. An SPV can be used to launder money or hide assets from creditors, which is the reason why legislation and regulations are in place to monitor their activities.
The most common form of an SPV is a limited liability company, but trusts, partnerships, and other types of legal entities can also be used as an SPV. One of the main benefits of using a limited company as a Special Purpose Vehicle (SPV) is limited liability. As a separate legal entity, a limited company SPV can enter into contracts and borrow money in its own name, which means that the shareholders of the parent company are not personally liable for the debts of the SPV. This provides a significant level of protection for the shareholders’ personal assets and helps to ensure that the creditworthiness of the parent company is not negatively impacted by the risks associated with the project or asset held by the SPV.
Another benefit of a limited company SPV is the flexibility in terms of ownership and management structure. Shareholders of a limited company SPV can be individuals, other companies, or even other SPVs, and the management of the SPV can be separated from the management of the parent company. This allows for the SPV to be tailored to the specific needs of the project or asset and can facilitate investment from a wide range of sources.
Limited company SPVs also offer a level of transparency and accountability required by regulators and investors. These companies are registered with regulatory authorities and must file annual financial statements and other reports, which provides transparency and allows investors to see the health of the company.
Additionally, limited company SPVs can take advantage of favorable tax treatment. Depending on the jurisdiction and the structure of the SPV, it may be possible to minimize or even eliminate the tax burden on the SPV and its investors. Especially if an SPV is the main shareholder of a trading company, then the dividends can be transferred and used for investment activities completely tax-free. Also, the corporation tax on profits from investments is capped at 19% instead of income tax, which can go up to 45%.
If you plan a new investment opportunity, feel free to give us a call on 0207 249 6000 or pop into our office in Beckenham. We will be happy to provide a free no obligation consultation on how SPV can be beneficial for your business.