A special purpose vehicle (SPV) is a subsidiary company created with asset structure and legal status that secure its operations even if the parent company goes bankrupt. An SPV can be established through trusts, partnerships, limited liability companies, or corporations. In Hong Kong, the main objective is enjoying the numerous tax benefits and good operational environment.
People may also craft SPVs for independent ownership, create artificial lease expensed on the parent company’s income statement as opposed to liability, or for protecting specific projects from operational related issues.
Requirements and types of SPV investors can form in Hong Kong
- Requirements for an SPV formation
To form a Hong-Kong company SPV, the following requirements must be met;
- The SPV has to be partially or fully owned by non-residents
- The special purpose vehicle must be incorporated outside Hong Kong
- The SPV must not engage in any trade activities except holding
- It should not be incorporated as an excepted private liability company
Often, meeting these requirements requires special understanding of the SPV structure and careful adherence to Hong Kong laws. The best thing is working with a professional.
- The main types of SPVs you can form in Hong Kong
In Hong Kong, you can opt to form two main types of SPVs. The main SPV is the Off-balance sheet SPV. Under this type, the assets, liabilities, and assets are recorded on its own balance sheet and not that of the parent company. This means the parent company does not feature the SPV as an equity or debt. The SPV is preferred for better assets and liability management.
The off-balance Hong-Kong company SPV assists in covering important info from investors and shareholders. It is only through comprehensive analysis of financial details that people can isolate related info.
The second type of SPV is the On-balance sheet formation. This SPV means that the parent company captures the equity and liabilities on the balance sheet. Many companies do not prefer the on-balance sheet SPVs because they do not cover the risks well compared to the off-balance sheet type.
Adding tax substance to your Hong-Kong company SPV
Approximately 90% of FDI (foreign direct investment) going to China goes via SPVs established in Hong Kong. Once your SPV is incorporated, it enjoys special tax treatment especially through DTAs (Double Tax Arrangements) between Hong Kong and other jurisdictions such as China and the entire Far East. But to enjoy from these DTAs, an SPV must demonstrate tax substance. Therefore, how do you add tax substance to an SPV?
Tax Substance became an important component for all SPVs that want to enjoy special treatment after the Tax Circular 601. The circular requires every Hong-Kong company SPV to do the following;
- Acquire TAX Residency Certificate
- Get some directors who are Hong Kong Residents
- Hold regular meetings in Hong Kong
- Operate an office with regular bills in Hong Kong
- Have direct phone and fax lines in Hong Kong
The Special Purpose Vehicle is a unique formation that can help to anchor the mother’s company especially in seeking additional finances for growth. If you base the SPV in Hong Kong, it will be more beneficial because of the numerous tax benefits. Make sure to also apply for Tax Residence Certificate for more benefits that come with Double Tax Arrangements between Hong Kong and other countries.