What is a Special Purpose Vehicle?

Special Purpose Vehicles, or SPVs, are legal entities that are set up for specific and limited purposes. These entities are commonly used in the business world to segregate assets, liabilities, and risks associated with a specific project, transaction, or investment. The main goal of setting up an SPV is to isolate a particular risk or group of risks from the parent company's balance sheet.

One of the most common uses of SPVs is in the field of securitization. When a company wants to raise funds by selling assets, such as mortgages, car loans, or credit card receivables, they can set up an SPV to purchase these assets. The SPV will then issue securities that are backed by the underlying assets, which are sold to investors. The cash raised from the sale of these securities is used to pay back the company that sold the assets in the first place, effectively converting illiquid assets into cash.

Another common use of SPVs is in the creation of joint ventures. When two or more companies want to collaborate on a specific project, they can set up an SPV to undertake the project. The SPV will have its own legal structure, governance, and funding, which will be separate from the parent companies. This allows the parties involved to share risks and rewards associated with the project, without affecting the balance sheets of the parent companies.

SPVs can also be used for tax optimization purposes. For example, a company may set up an SPV in a jurisdiction with favorable tax laws to hold intellectual property rights, such as patents or trademarks. By doing so, the company can reduce its tax liability on the income generated from the intellectual property rights.

Despite their benefits, SPVs can also be used for nefarious purposes. For example, they can be used to hide assets or liabilities from creditors or to avoid taxes. The use of SPVs in offshore tax havens has also been criticized for facilitating money laundering and other illegal activities.

In conclusion, SPVs are an important tool for businesses to isolate risks, optimize taxes, and collaborate on projects. However, they should be used with caution and transparency, to ensure that they are not used for illegal or unethical purposes. As with any legal structure, the benefits and risks of SPVs should be carefully considered before setting them up.