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Special Purpose Vehicles in Hong Kong – Everything you need to know

A Special-Purpose Vehicle, or SPV, is a separate legal entity, usually in the form of a Hong Kong private limited company, that is formed for a single, focused purpose, usually investing. Financial institutions and those in the real estate market were the only ones who used SPVs. It permitted a parent business to use its SPV to make highly leveraged or speculative transactions without putting the entire company at risk. 

Special Purpose Vehicles in Hong Kong

What is a Special Purpose Vehicle in Hong Kong?

A special purpose vehicle is a subsidiary company founded for a specific corporate purpose or activity (SPV). SPVs are commonly used in structured finance transactions, including asset securitization, joint ventures, and real estate transactions, as well as to separate parent company assets, operations, or risks. An SPV is a separate legal entity with its own balance sheet. It can be used to take on a risky project while minimizing the financial impact on the parent firm and its investors. Alternatively, the SPV could be used as a holding company for debt securitization.

Why do companies form special purpose vehicles? 

A special purpose vehicle (SPV) is a sort of corporate structure that permits a subsidiary to function independently from its parent company. This reduces financial risk and attracts unusual investment. Financial reporting and filing of financial statements, as well as the allocation of a special purpose vehicle’s own balance sheet and assets, occur separately from those of the primary firm. This is owing to the two entities’ different legal positions. The fact that the SPV is kept off-balance sheets exemplifies how this type of arrangement can protect parent firms from risk. Both large and small businesses can use subsidiary firms or special purpose vehicles (SPVs) for ethical and financial reasons. However, there have been instances of entities employing SPVs for malevolent or illegal purposes.

Why do businesses choose Hong Kong to form Special Purpose Vehicles?

A special purpose vehicle (also known as a special purpose entity in other countries) is a walled organization that sits under a parent company, as it is in other international marketplaces. Its goal is to keep important assets apart from the parent firm, so as to isolate risk. If the parent company falls bankrupt, the assets of the special purpose vehicle are isolated from the bankruptcy, allowing the special purpose vehicle to operate normally. A special purpose vehicle also increases the appeal of the parent firm to potential investors by demonstrating that the company’s risk mitigation strategies are in place. A fully incorporated corporation, a trust, or a partnership can be used as a special purpose vehicle in Hong Kong.

Benefits and Risks of Special Purpose Vehicles

An SPV is created by a parent business to isolate or securitize assets in a separate company that is often kept off the balance sheet. It might be founded to take on a high-risk project while shielding the parent firm from the worst consequences of failure. A subsidiary company formed for a specific business purpose or activity is known as a special purpose vehicle (SPV). SPVs are widely used to isolate parent company assets, activities, or risks in structured finance applications such as asset securitization, joint ventures, and real estate transactions. While there are numerous legal reasons to create an SPV, they have also been implicated in a number of financial and accounting scandals.

Collaborations between a government agency and a privately owned corporation are known as public-private partnerships. Many private partners insist on a special purpose vehicle as part of the deal in public-private partnerships. This is especially true for capital-intensive projects like infrastructure construction. Because the private firm may not want to take on too much financial risk, an SPV is formed to take on some of the risks.

Benefits of Special Purpose Vehicle 

  • By forming SPVs, private enterprises and institutions can have better access to capital markets.
  • The most typical motivation for forming SPVs is to securitize loans; normally, the interest rates due on securitized bonds are lower than those given on the parent company’s corporate bonds.
  • The assets of the company can be housed in the SPV, which keeps them safe and secure. When a corporation runs into financial difficulties, it reduces its credit risk.
  • The SPV’s credit rating is still good, so investors are comfortable buying bonds from it.

What are the requirements of Special Purpose Vehicles in Hong Kong?

In order to form a special purpose vehicle in Hong Kong, you must meet five major criteria:

  • A fully incorporated parent company outside of Hong Kong is required for the special purpose vehicle.
  • Only a holding company can be used as a special purpose vehicle.
  • The special purpose vehicle is capable of conducting a trade or any other type of business activity.
  • A non-resident of Hong Kong must possess a special purpose vehicle in part or in whole.
  • The special purpose vehicle cannot be a private firm that is approved or immune.

How do you form an SPV in Hong Kong?

If you haven’t worked in the banking or real estate industries previously, the term “Special Purpose Vehicle” may be strange to you. In Hong Kong, a Special Purpose Vehicle, or SPV, is a corporation, usually a subsidiary, that is used to protect the assets of the parent company’s investors in the event of bankruptcy.

In order to establish a Special Purpose Vehicle in Hong Kong, a corporation must first:

  • Must have a fully established or registered parent company outside of Hong Kong.
  • A non-resident of Hong Kong must own the property in whole or in part.
  • It’s only possible to be a holding company.
  • It is forbidden to engage in any type of commerce, trade, or activity.
  • It must not be registered as a private firm that is immune or exempt.

Need Any Assistance in Forming Your Business in Hong Kong? 

Startupr can help you in the incorporation of your organization in the most effective and easiest way. When starting a business it’s critical to stay informed on the legal policies. Startupr provides HK company registration and incorporation, mail forwarding, and accounting services to assist you to start a business in Hong Kong.

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