What Is a Special Purpose Vehicle (SPV) in Hong Kong, and How Does It Work?

Establishing a Special Purpose Vehicle is not merely a procedural step—it’s a strategic decision that can unlock numerous benefits. From risk management and asset separation to facilitating capital raises or investments, there are myriad reasons why businesses turn to set up a separate company in the form of a Special Purpose Vehicle.

Now, let’s examine these benefits in detail.

1 Risk mitigation

A Special Purpose Vehicle SPV serves as a protective shield, isolating financial risk and ensuring that even if the parent company faces bankruptcy, the Special Purpose Entity remains unaffected. This allows the parent company to venture into riskier territories, knowing that potential negative financial consequences will be contained within the Special Purpose Vehicle and its specific assets, thereby safeguarding the parent company and its investors.

A Special Purpose Vehicle, SPV can also play a pivotal role in securitising debt obligations by acting as a reassurance for investors regarding the repayment of investments. They can participate as counterparties in derivative transactions that are sensitive to credit, such as swaps, thus managing financial risk through market instruments.

The ability to legally separate the parent company’s specific assets using a Special Purpose Vehicle as a separate legal can isolate financial risk and protect the parent company from financial risks associated with those assets.

2 Enhanced securitisation

SPVs play a key role in the securitisation process. They enable companies to:

• Transfer assets, which are then used to issue securities backed by these assets
• Raise additional capital
• Offload credit risk onto investors who purchase tranches, catering to the unique credit risk preferences of different investors.

In the securitisation process, SPVs contribute by:

• Ensuring legal isolation and bankruptcy remoteness
• Safeguarding securitised assets in the event of the originator’s bankruptcy or financial distress
• Transferring assets such as mortgage loans or real estate to an SPV. Here, the SPV is essentially holding major assets and managing them on behalf of investors
• Insulating investors from the financial risks and liabilities of the originator
• This potentially leads to better credit ratings for securitised securities due to the perception of lowered credit risk and higher security.

3 Streamlined asset transfer

The use of SPVs can greatly simplify the transfer of assets. They enable investment managers to channel more capital into a particular asset, increasing their influence and control over the asset. Furthermore, they can facilitate co-investment opportunities for limited partners who wish to invest additional capital in a specific company without disrupting other investors.

The use of SPVs can streamline administration processes as they:

• Only require the SPV to sign documents
• Reduce the impact of shareholder changes on the share structure of the underlying portfolio
• Enable the transfer of assets in a more streamlined manner

4 Efficient property transactions

SPVs are particularly beneficial in the realm of real estate. They function as independent subsidiary companies that are set up specifically to transfer and confer ownership of real estate assets. Shareholders of a real estate SPV are entitled to the income generated from the properties it owns, and all financial activities are recorded in the subsidiary’s accounts.

An attractive benefit of using SPVs in real estate is the potential for tax efficiency. Hong Kong does not impose a capital gain tax, so profits from the sale of real estate held by an SPV are not taxed as a capital gain. This can result in significant tax savings

Now that we’ve explored the benefits of Special Purpose Vehicles let’s guide you through the process of creating one in Hong Kong. We’ll walk you through the pre-incorporation essentials, the incorporation procedure, and what to do after you’ve successfully incorporated your SPV.

Pre-incorporation essentials

The first step in setting up an SPV is choosing a unique company name. This name should comply with Hong Kong regulations, meaning it should be in either English or Chinese, and it should not resemble the name of an existing company.

Alongside choosing a unique company name, you must associate this name with a physical address located in Hong Kong. This is an essential step to ensure that your SPV is legally registered and recognised as a separate entity in Hong Kong.

Incorporation procedure

After settling on a unique company name and a registered address in Hong Kong, the next step involves meeting the essential criteria for registering an SPV in Hong Kong. To comply with the regulations, you must submit completed registration forms containing the necessary information to the Companies Registry. This formalises the registration of your SPV.

Typically, registration for an SPV in Hong Kong is completed within approximately four working days following the payment of registration fees.

Post-incorporation compliance

Once your SPV is officially registered, you will need to comply with certain post-incorporation requirements. These include complying with the Companies Ordinance.

The Companies Ordinance requires you to hold annual general meetings, the filing of annual returns, and the keeping of proper accounting records.

In addition, you’ll need to make annual declarations to the Companies Registry to confirm ongoing compliance with statutory requirements. Proper tax planning is also essential for SPVs to optimise their tax position, such as determining tax residency and leveraging double taxation agreements.

Choosing the right structure for your SPV is a crucial decision that will largely depend on the specific needs and objectives of your business. In Hong Kong, an SPV can be structured in various forms, such as:

• Limited partnership
• Trust
• Corporation
• Limited liability corporation

The Hong Kong company structure, known as the Private Limited Company, is the predominant choice for Hong Kong companies when establishing SPVs in Hong Kong.

Limited Partnership vs. Private Limited Company

When choosing between limited partnerships and a private limited company, there are several key factors to consider. For a Hong Kong SPV, key personnel such as at least one director, a company secretary, and one shareholder are required. Establishing a Hong Kong limited company as an SPV requires a registered address within Hong Kong, a defined share capital, in addition to key personnel.

The governance of a private limited company SPV is typically more structured than that of an LP. This is due to the need for designated roles such as directors and a company secretary. A private limited company may be more suitable as an SPV when a formal organisational structure with clearly defined roles is desirable or required.

Notably, a Hong Kong SPV cannot be structured as an Excepted Private Company, as this entity type is reserved solely for individual ownership.

Operating an SPV comes with its own set of legal implications and potential tax benefits. It’s crucial to understand these aspects to ensure that your SPV operates within legal boundaries and leverages tax advantages effectively.

Legal entity responsibilities

An SPV is a separate legal entity with its own set of responsibilities. These include establishing a corporate governance framework that includes the creation of a board of directors and the mandate to hold annual general meetings. The directors of an SPV are tasked with overseeing operations and ensuring that the SPV’s activities are in compliance with relevant laws and regulations.

To maintain its separate legal status, an SPV must ensure a clear separation of its liabilities and assets, which shields the assets from the parent company’s financial obligations.

Failure to adhere to these legal and regulatory requirements can lead to penalties.