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 efficiency 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, SPV 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.
Issues regarding SPV use in Hong Kong
Companies in Hong Kong may have various reasons to use a special purpose vehicle. However, the misuse of the company can results in accounting issues that may present risks to the parent company and, in some cases, bring forward a conflict of interest case. The SPV can be used for concealment purposes, in order to mask the company’s true financial situation.
Hong Kong has no special rules for substantive consolidation and this means that the SPV, including a foreign one, will retain its own legal personality and will have separate rights and liabilities. Nonetheless, in certain cases, the SPV will not benefit from being treated as having separate legal personality. This is the case when an element of fraud is discovered by the concerned authorities or when one of the companies (either the SPV or the parent company) brings an illegal purpose to the arrangement.
Our team of company formation agents can help you structure an SPV that will help protect you from misuse and will allow the vehicle to be used lawfully, and undertake its specific purposes or business activities. Some possibilities to ensure risk protection include the following: making sure that the obligations of the SPV are not guaranteed by the originator, keeping the corporate activities of the companies separate from one another (for example, use a corporate service provider in case of the SPV – which will mean that this entity will have its directors appointed by the service provider). Additionally, the SPV can issue its own audited accounts and making sure that there are no legal possibilities to set aside the obligations of the SPV.
Moreover, our team can also help investors who wish to invest in a Hong Kong company that has a special purpose vehicle as its subsidiary. In this case, investors should verify the financial information of both the parent company and the special purpose vehicle before finalizing their investment. This is done in order to ensure that the SPV is not used to mark important financial information that would otherwise prompt entrepreneurs to refrain from making the respective investment.
The SPV in Hong Kong can be structured in many ways, although most commonly it will be as a private limited liability company. Our team can assist investors that wish to open this type of vehicle in order to provide protection for the assets of a parent company as well as, or alternatively, use the SPV to raise capital.
Invest in Hong Kong
The legal framework used to establish an SVP is the one set forth by the Companies Ordinance. As previously mentioned, the private limited liability company is a commonly used business type for this vehicle. In addition to following the requirements for company formation in Hong Kong, the SPV is not subject to special regulatory requirements itself, however, its purpose and structure may make it mandatory for the founders to obtain licenses (in selected cases).
Below, our company incorporation experts list the main steps to open a LLC in Hong Kong. Please keep in mind that personalized solutions for structuring the LLC that is used as a special purpose vehicle are provided upon request. The following is a general LLC incorporation guide for investors who wish to know the main steps.
Choose the company name: it will not infringe any existing names that belong to already registered companies; it can be in English, Chinese or both and special rules apply for the use of certain words;
Prepare the documents: the company’s Articles of Association will include information about the business type, its name and registered office in Hong Kong and its shareholding structure; the purpose of the company can also be stated and, in this case, a holding purpose will be chosen by investors;
Submit the documents for registration: once the name is approved and the documents are prepared, the founders can submit the documents in order to register the legal entity with the Companies Registry;
Receive the certificate: after the application is approved, the company owner can collect the two certificates: the Business Registration Certificate and the Certificate of Incorporation (in electronic form or in hard copy, depending on the selected mode of delivery and the type of application that was submitted).
The Companies Registry imposes certain fees for its main services. The following are listed below, however, please keep in mind that these can be subject to change:
1,545 $ the fee for the incorporation of a company limited by shares to receive the certificates in electronic form;
1,720 $ the fee for the incorporation of a company limited by shares to receive the certificates in printed form;
if the application for the company registration is rejected, the applicant may make de request for a refund of 1,280 HK$.
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