By Vlad Cuc, specialist in company formation matters
A special purpose vehicle (SPV) is a company in Hong Kong, usually, a subsidiary, incorporated to serve as a means of securing the assets of the investors of the parent company faces bankruptcy.
The reason who many foreign investors choose Hong Kong as the jurisdiction from which to manage an SPV is that the city has a favorable tax regime and has signed a number of double tax treaties. Investors interested in company registration in Hong Kong can explore this business option and its advantages.
Our experts invite you to watch a video about the uses of a special purpose vehicle:
Legal entities that qualify as SPVs in Hong Kong
Special purpose vehicles in Hong Kong can take the form of a corporation, partnership or trustee. The chosen form must meet these important criteria:
-must be owned in full or partially by a non-resident in Hong Kong;
-must be incorporated or registered outside of Hong Kong;
-does not engage in trade or activities other than holdings;
-must not be registered as an excepted private company.
The SPV can be created in order to hold and administer an excepted private company, from Hong Kong. The latter is a private company incorporated outside Hong Kong that satisfies certain conditions. The SPV should engage only in holding and not in other activities (for example transacting on behalf of the foreign company).
The list below includes some of the most important steps when establishing a special purpose vehicle:
incorporate the company: the SPV is incorporated as per the Companies Ordinance and has legal personality; there are no special regulatory regimes for it, however, special permits and licenses may be required according to its structure.
ensure the securitization of the transactions: investors have several options for the purpose of securing the transactions made via the SPV; examples include but are not limited to limiting recourse to the SPV to the acquired assets, making sure that the SPV is not part of a corporate group or restricting counterparties from initiating insolvency proceedings on the SPV (via a contract).
ensuring separate treatment for the SPV: the separate treatment is in relation to the originator, should this become subject to insolvency; because the SPV has its own legal personality, it does not take on the rights and liabilities of its originator – an advantage for those who choose to incorporate in Hong Kong; however, there can be some exceptions to this.
issuing securities: the decision between issuing public or private securities, based on the investor’s requirements, the listing costs, the regulatory and tax requirements as well as the originator’s target to attract funding (from a wider range of investors in case of public securities).
As stated above, in general, SPVs are separate legal entities and therefore have separate rights and liabilities from their originator. There are, however, a few situations in which the separate legal identities of the companies can be ignored and this can occur in case of fraud, when one company is illegally participating in the arrangement or when a third company is used to deceive other parties. One manner in which investors and business owners can ensure that the situation in which the SPV and the originator are subject to the same treatment is to make sure that the corporate activities of the special purpose vehicle are kept separate from those of the originator. Another good practice is to avoid the mix of the assets of the two legal entities as well as make sure that the SPV draws ups its own, separate audited accounts.
One of our company registration agents in Hong Kong can give you more information about companies that are used as special purpose vehicles. If you are an investor who already owns a company and could use an SPV to secure your obligations, you can contact our agents for personalized information.
SPVs in Hong Kong
In general, special purpose vehicles are used by business owners, investors and companies or institutions such as banks that need to enhance their tax efficiently and improve their financial management practices. By using an SPV, foreign companies can enhance their investment opportunities and their presence in the Special Administrative Region.
SPVs in Hong Kong can enjoy the full spectrum of tax benefits when they acquire a tax residency certificate, issued by the Internal Revenue Department. For this purpose, one of our Hong Kong company formation agents can help you submit the generally required documents: a copy of the incorporation certificate and a certified extract of information on the business.
Because Hong Kong is commonly used as a location to base an SPV for the purpose of holding investments in the People’s Republic of China (due to the close proximity), it is common for these special purpose vehicles to obtain the needed certificates from the IRS in order to benefit from the favorable tax rates applicable according to the Hong Kong – China double tax treaty. These rates are:
-10% withholding tax rate for dividends, interest and royalties and capital gains under a non-treaty regime;
-5% rate for dividends, 0% or 7% rate for interest and 7% rate for royalties as well as 0% for capital gains under the treaty.
It should be noted that the withholding rate of 5% for dividends, for example, applied to those dividends paid by a Chinese company to its Hong Kong special purpose vehicle/holding company that holds at least 25% of the capital of the Chinese legal entity making the payment. As such, it SOV owners in Hong Kong will require the Hong Kong resident status certificate in order to enjoy these benefits.
Hong Kong has a pro-business regulatory regime both for taxation and in terms of the available business structures. Investors may choose to form a public orprivatelimited liability company (two of the most commonly used forms) or start a single-person business in the form of a sole proprietorship. It is important to know that each business form has its own particularities and different requirements for taxation and financial reporting.
The SPV can be successfully used by a foreign company that invests in Hong Kong mainly because of the fact that the parent company’s assets are separate from those of the Hong Kong-based SPV. Working with our team of experts for the purpose of incorporation and for achieving substance can be important for the future of the special purpose vehicle. With our help, foreign investors in Hong Kong can find tailored-made structuring solutions.
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