Special Purpose Vehicle (SPV) in Hong Kong: Whats And Hows

Incorporating a separate company in Hong Kong for a sole reason, such as safeguarding specific assets, is a popular choice among global entrepreneurs. And the ideal framework for such an endeavor is a Special Purpose Vehicle, commonly known as an SPV.

In this article, we will look into the characteristics of this entity within the Hong Kong business landscape, the purposes behind its incorporation, and the legal regulations governing the SPV. Stay tuned to gain more insights!

What is a Special Purpose Vehicle?

A Special Purpose Vehicle (SPV), also known as a Special Purpose Company, is a legal entity created for a specific, often limited, and well-defined objective by a parent company. In Hong Kong, this entity is strictly for holding investments.

SPVs have the advantage of being a separate legal entity from their parent company. This gives entrepreneurs a safety net to protect their assets or hide financial loss by holding them in a different entity. Even if one entity goes bankrupt, the other(s) can continue to operate. For this reason, SPVs are also referred to as bankruptcy remote entities in some jurisdictions.

In general, there are two primary categories of SPVs:

• A Hong Kong subsidiary operating directly under the parent company; or
• A brand-new business not reflected in the parent company’s financial statements.

Essentially, these models offer extreme value thanks to their flexibility to manage financing and attract investments, without assuming any liability from the main business.

What is the purpose of setting up a SPV?

Special Purpose Vehicles (SPV) are versatile tools and can be employed in various industries, including real estate, finance, and infrastructure development. To help you navigate better, below are a few reasons why so many entrepreneurs opt for this model:

Safeguard assets and manage liabilities

SPVs are commonly used by Hong Kong companies that engage in high-risk activities, such as real estate or energy exploration. This entity is formed to make sure that specific assets are not affected by the operations of the parent company.

In such cases, the parent company establishes an SPV to handle the assets and liabilities related to these projects separately. By doing so, they create a protective barrier that shields the parent company from potential negative impacts from these high-risk ventures.

Facilitate investments in certain businesses

Let’s say you are a member of an investor group aiming to invest in a high-risk but potentially rewarding Hong Kong startup. While each member intends to contribute to the investment individually, each of the amounts may not secure favorable deals. As a solution, the group decided to create a collective SPV that invests in the startup under only one capitalization structure. This allows you to participate in the investment opportunity with fewer initial commitments and risks.

Another example to consider is when entrepreneurs aim to invest in a business that doesn’t align with the investment strategy of the parent company. In such cases, they can form an SPV dedicated solely to investing in that business.

Create entities for managing projects

Establishing a Special Purpose Vehicle exclusively for a project or venture enables businesses to navigate complex transactions and mitigate risks with greater efficiency.

In the context of real estate, where asset protection is paramount, distinct SPVs can be created for each phase (e.g. land acquisition, construction, sales). This approach lets businesses transfer the necessary assets through comprehensive transactions much more seamlessly, such as by selling the entire entity.

Consider another instance when a company engages in projects that require mandatory permits that are intricate to obtain (e.g. operating a power plant). With an SPV in place, the company can simply transfer the entity as a complete package. As a result, the procedures are streamlined for smoother execution.

Benefit from tax incentives and local regulations

Besides the reasons above, SPVs are also strategically used by foreign investors to maximize tax reductions and advantages.

For instance, Hong Kong is often used as a location to base an SPV for holding Chinese investments. As a Hong Kong entity, the SPV falls under its taxation system, thereby enjoying advantages from the tax incentives and Hong Kong – China Double Taxation Agreements:

• Profits are taxed only once
• Low corporate tax
• No capital gains tax
• No withholding tax on dividends;
• Certain profits from outside sources are tax-exempted;
• And many more benefits.

Conversely, Hong Kong-based companies can opt for SPVs in countries like the Cayman Islands, British Virgin Islands, and other low-tax jurisdictions with favorable conditions when they deem it advantageous.

Although this model is advantageous, keep in mind that the business must comply with the legal regulations of all relevant jurisdictions. Furthermore, make sure that you are using this entity for a legitimate purpose. In case of violation, cumulative penalties will likely be imposed.

How to incorporate an SPV in Hong Kong

Now that we have grasped a fundamental understanding of the Special Purpose Vehicle, let’s delve into the formation process of this entity in Hong Kong.

Incorporation requirements

The requirements for setting up a Special Purpose Vehicle (SPV) in Hong Kong will vary depending on your specific situation.

For an existing Hong Kong-based business, the SPV forming process is straightforward and similar to the typical company formation procedures.

However, for a foreign business to incorporate an SPV, there are additional criteria to consider:

• A parent company must be registered and fully incorporated outside of Hong Kong.
• The business must be either fully or partially owned by a non-resident of Hong Kong.
• The SPV should strictly function as a holding company only.
• Engagement in any business activities, such as trading, is prohibited.

Steps to establishing a Hong Kong SPV

Setting up an SPV in Hong Kong includes the following crucial steps:

Step 1: Decide on a legal structure

First, you should decide on the business structure of this entity. There are quite a range of options to decide on, including:

• A general or limited partnership
• A trust with an individual or entity serving as a trustee in Hong Kong; or
• A Private Limited Company, which is the most preferred choice for entrepreneurs.

Notably, a Hong Kong SPV cannot be structured as an Excepted Private Company, as this business entity type is exclusively permitted for individual ownership.

Step 2: Pick a company name

After the entity type is decided, the next step is to choose a suitable name that aligns with the Hong Kong company name requirements set by the Companies Registry. Following this, an application should be submitted to obtain approval from the relevant authority.

To exemplify, the name shall be in English or Chinese, but not a combination of both. Additionally, it must be unique and not resemble any existing company name. For a subsidiary, the name of the SPV can be similar to or different from the parent company’s name.

Step 3: Choose a registered address

The registered address is the designated location for receiving all official company documents and communications. This must be a physical address located within Hong Kong and should be easily accessible to the public during standard business hours.

It’s important to note that residential addresses are not permitted for corporate purposes.

Step 4: Decide on personnel and capital structure

The Hong Kong SPV must include and appoint the following key persons:

• At least one director: this individual/entity can either be a resident or non-resident
• At least one shareholder: this individual/entity can either be a resident or non-resident
• A Hong Kong resident company secretary: this can either be a Hong Kong local individual or a legal entity.

Furthermore, your company shall uphold a minimum share capital of HK$1.00, with no maximum limit.

Step 5: Register your company in Hong Kong

Once all the factors above have been decided, the final step is to register the SPV with the Companies Registry by submitting the necessary documents such as:

• The Articles of Association;
• Shareholder’s identification documents (e.g. passports, ID cards, etc.);
• Copies of company documents; and
• The required registration forms.

Upon approval, the Companies Registry will issue a Certificate of Incorporation for your company. With the successful incorporation of your Special Purpose Vehicle, you can proceed with obtaining any necessary permits if applicable, or opting for a business banking account.

Conclusion

In summary, the Special Purpose Vehicle (SPV) serves as a powerful tool for protecting assets, handling liabilities, and attracting investments to facilitate business expansion. This approach is particularly popular in Hong Kong, a renowned financial hub where global businesses incorporate the SPV for holding investments.

While this entity brings benefits and its structure is technically legal, it’s crucial to always seek advice from professional experts to ensure compliance and avoid potential penalties.

Simply reach out to our dedicated team for any inquiries or assistance regarding business operations in Hong Kong via service@bbcincorp.com. We look forward to supporting you!

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