Discover what an SPV or Special Purpose Vehicle refers to, and the requirements to set up this type of business in Hong Kong.
You might not be familiar with the term “Special Purpose Vehicle” if you haven’t worked in finance or real estate. In Hong Kong, an SPV, or Special Purpose Vehicle, is typically a subsidiary company established to safeguard the assets of investors in the parent company in the event of bankruptcy.
For instance, let’s say that you are an investor with an asset share in a fictional Chinese company called ABC Ltd. The SPV will be used to put your assets in this separate entity instead of directly into the ABC company. In the event that ABC company shuts down, SPV can still run the business independently, safeguarding your investment.
If you are one of those who are contemplating various business registration options, knowing what an SPV is and why Hong Kong is in favor of establishing such entities can be helpful. Do not hesitate to contact us for any questions regarding company registration, bookkeeping, accounting, and company secretarial work.
Content Outline
What does Special Purpose Vehicle (SPV) Mean?
In Hong Kong, SPVs may be a company that is fully incorporated, a trustee or a partnership.
The establishment of an SPV in Hong Kong might be somehow different from the registration of a whole new company in Hong Kong. The legal requirement may follow the Companies Ordinance like a normal company incorporation, but there are other requirements to deal with.
SPVs should follow a regular company structure, thus they should keep a separate balance sheet away from their parent company. Profit and losses of SPV should be written in the SPV’s balance sheet just as the balance sheet of the normal company does. This, in a way, safeguards the interests of the investors and so your SPV can be attractive to potential investors.
If you are not sure about what type of incorporation is suitable for your company, or if you are an existing business owner who requires the formation of an SPV for your company, FastLane can help you with your company incorporation.
What’s required to form a Special Purpose Vehicle (SPV) in Hong Kong?
To establish an SPV in Hong Kong, the prospective company must meet the following 5 criteria:
- It must be associated with a parent company that is fully incorporated or registered outside of Hong Kong.
- The ownership of the SPV must be wholly or partially held by a non-resident of Hong Kong.
- The SPV can only function as a holding company.
- It is prohibited from engaging in business operations, trade, or any other activities.
- The SPV cannot be registered as an immune or accepted private company.
Why choose Hong Kong for SPV (Special Purpose Vehicle)?
SPVs are the core investment product and tax planning tool of business owners, investors, companies and institutions such as banks for better management of their financial and tax affairs. Therefore, it won’t be surprising that this is the reason why SPVs are gaining traction, especially in Hong Kong with a favorable tax law.
Investors have three main reasons why they are attracted to this city as their potential base. We are going to look into that in more detail below.
1. Hong Kong: Key Financial Hub in Asia
Hong Kong is the neighboring area with Mainland China and carries the reputation of a financial hub in Asia with a straightforward law and financial system. They are the way to enter China market and the way to have Chinese investment holding. SPVs are attracting foreign investors and that make them very popular for them too.
2. Corporate Structure in Hong Kong
Applying an SPV as a holding company that is incorporated as a separate entity from the parent company will be considered as a key component in China’s market entry strategic approach. Take, for example, Mark Holdings HK (a Hong Kong-based company that is owned by Mark, US-based). Mark Holdings HK acts as a WFOE (Wholly Foreign-Owned Enterprise) and manages the assets or entities that are situated in China.
Under Mark, being the owner of the US-based company, he can divest any China-owned entities in Mark Holdings HK through the process of selling these shares. This makes Mark an owner of all the assets or entities of the Hong Kong company that manages things in China, thus bringing all the advantages to him.
3. Favorable Tax System
More often called the Double Tax Agreement between Mainland China and Hong Kong, the treaty gives a rate of withholding tax on dividends. However, the rate is still subject to the fulfillment of some criteria.
What is the Double Tax Agreement (DTA)?
In December 2019, the Fifth Protocol of the Double Taxation Avoidance Agreement (DTA) between China and Hong Kong was signed. Its fundamental goal was to avoid the double taxation on income and to adjust the tax rights between Hong Kong and other countries. This amendment enhances the efficiency of the existing tax regime in Hong Kong.
As Hong Kong is one of the most popular jurisdictions for SPV formation, the regulatory system has been strengthened for such corporations with the aim of holding investments with China. In case you are aiming to utilize the SPV for entering the China market, it is vital to get the required certificates issued by the Inland Revenue Department of Hong Kong, for instance, the Certificate of Resident Status and the Mutual Agreement Procedure. Moreover, the necessity of corporate and tax papers from both countries will be a prerequisite for the tax treaty. Do not hesitate to get in touch with us for a detailed dialogue on the topic.
How FastLane Group Can Help?
Definitely, creation of an SPV can be challenging since there are many factors to consider. As with any business decision, it is important to be aware of the legal rules of the country, especially as Hong Kong has recently been trying to tighten its laws in order to combat fraudulent and illegal activities. Yet, should you need assistance in company formation or setting up proper bookkeeping practices, FastLane is there to help you.