Special purpose vehicles

Special purpose vehicle/entity (SPV/SPE) is separate legal entity created by an organization for specific, often narrow and temporary purpose, typically to isolate company from financial risk, including bankruptcy.It can be understood as subsidiary of larger company but it has its own assets and liabilities.

There are several uses of special purpose vehicles. Because every project carries certain amount of risk parent company will use SPV to shield itself from risk in a legal way. This way companies can execute large financial projects without putting the whole firm at risk.

Securitization of loan is another common usage of SPVs. It is used when banks that issue mortgage-backed securities whose payment comes from pool of loans. In order to ensure that investors in mortgage-back securities are payed first bank will establish SPV, separating it from other obligations and giving it a priority in payment.

Management of assets with exceptionally complex financial transactions can be relocated in SPV, making it easier to track income and expenses. Also some assets can be harder to transfer so companies can put them in SPV and sell them together. Because SPV owns assets, associated permits and contracts transfer of assets is easier.

In some cases taxes on property sale can be higher than one for capital gains, company can create SPV that will own property for sale and pay tax for capital gains and not property sale. SPVs created and registered in tax havens allows tax avoidance strategies not available at home country. Chinese shareholders often set up offshore SPVs as a means of financing existing Chinese businesses, allowing them to gain the benefit of certain tax and exchange preferences only available to foreign investors.

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