The term “Special Purpose Vehicle” may be unfamiliar to you, if you have not dealt with the finance or real estate sector before. A Special Purpose Vehicle, also known as an SPV, in Hong Kong is a company, usually a subsidiary used to secure the assets of the investors of the parent company in case it faces bankruptcy.
For example, you are an investor who has an asset share in the China company, Fortycent (fictional company). If Fortycent uses a SPV, you can place your assets into the SPV, instead of the company itself. In any case Fortycent goes bankrupt, the SPV company can still operate.
If you’re researching on the different formations to register your business, this article will explore what a Special Purpose Vehicle entails, and why Hong Kong is a hotspot for starting an SPV. Otherwise, drop us a chat to ask us any questions on company registration, bookkeeping, accounting, and company secretarial work.
What is a Special Purpose Vehicle?
In Hong Kong, SPVs can be a company that is fully incorporated, a trustee, or a partnership.
Forming an SPV is somewhat different from registering a whole new company in Hong Kong. The legal requirements may follow the Companies Ordinance just like normal company incorporation, but there are other requirements as well.
SPVs should act as a normal company and therefore, should keep a separate balance sheet from its mother company. Profits and losses should be stated in the SPV’s balance sheet as well, just like a usual company would. This also protects the interest of investors and helps your SPV attract potential investors.
If you are unsure about how to incorporate your company, or if you are an existing business owner looking to form an SPV for your company, Osome can help you with your company incorporation.
What do you need to form a Special Purpose Vehicle entity in Hong Kong?
To form an SPV in Hong Kong, the chosen company needs to fulfill these 5 requirements:
- Should have a mother company fully incorporated or registered outside of Hong Kong
- Must be owned fully or partially by a non-resident in Hong Kong
- Can only be a holding company
- Cannot engage in business operations, trade or activities
- Cannot be registered as an immune or excepted private company
Why choose Hong Kong to establish Special Purpose Vehicles?
SPVs are mainly used by business owners, investors, companies and institutions such as banks to better manage their tax and financial management practices. Thus, it's no wonder why SPVs are gaining popularity, especially in Hong Kong with a favourable tax regime.
There are three main reasons why investors are interested in using this city as a base, which we will go into detail below.
1. A Major Financial Hub in Asia
Hong Kong is in close proximity to Mainland China and is a key financial hub in Asia with a straight-forward legal and financial system. It is a great way to enter the China market, especially if you want to hold Chinese investments. SPVs are especially popular for foreign investors as well.
2. Hong Kong’s Corporate Structure
Having a holding company in the form of an SPV can be a way to enter into China’s markets. One example would be if a US company owns an entity in Hong Kong. In turn, the Hong Kong company owns China-based assets or entities as a Wholly Foreign-Owned Enterprise (WFOE).
Jonathan is the owner of US company Jon Enterprise. Under Jon Enterprise is its Hong Kong entity Jon Enterprise HK. Jon Enterprise HK manages China-based assets. Jonathan can then sell any China-based entities held under Jon Enterprise HK by disposing of its shares, thus gaining benefits from all the China-based assets or entities his Hong Kong company holds.
3. Preferential Tax Benefits
Better known as the double tax agreement between Mainland China and Hong Kong, the treaty provides a rate of withholding tax on dividends. Of course, this rate is subjected to meeting certain conditions.
What is the Double Taxation Agreement?
In December 2019, the Fifth Protocol of the Double Taxation Avoidance Agreement (DTA) was finalized between China and Hong Kong. Its main goal was to prevent double taxation of income as well as to adjust tax rights between Hong Kong and other countries. This is on top of Hong Kong’s very clear-cut tax regime.
Because of its popularity for SPV formation, Hong Kong has also stepped up its legal rules for companies who wish to hold investments in China. If you are considering using a SPV as a stepping stone towards the China market, keep in mind that you need to obtain the needed certificates from the Inland Revenue Department of Hong Kong, such as the Certificate of Resident Status and a Mutual Agreement Procedure. You will also need various corporate and tax documents from both jurisdictions to qualify for the tax treaty. Talk to us to find out more about these in detail.
Of course, forming an SPV may seem like a difficult decision to make, as there is a lot to take into consideration. As with all business decisions, it is important to remain aware of the legal policies that the country has, especially since Hong Kong has been revising its laws to clamp down on dishonest and illegal transactions. Nonetheless, if you need help with forming your company, even setting right bookkeeping habits, Osome is here to help.