Special Purpose Vehicle

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Description of Special Purpose Vehicle. Explanation.


Definition Special Purpose Vehicle. Description.

A Special Purpose Vehicle (SPV) is a company / legal entity with a limited purpose or focus. It is created by a corporation to conduct a specific or temporary activity. It is normally, but not necessarily, owned almost entirely by the sponsoring corporation. It must be distanced from the sponsor both in terms of management and ownership (not 100%), because if the SPV were to be owned or controlled by the sponsor, the SPV would be consolidated with the rest of the firms for regulatory, accounting, and bankruptcy purposes and there would be no difference between a subsidiary and an SPV.

Usages of Special Purpose Vehicles. Applications

Some common uses of such SPVs are (depending on the jurisdiction):

  • Conducting large and risky projects without putting the parent firm at risk.

  • Off-Balance Sheet Financing.

  • Operating in ways that are "barely legal".

  • A special Joint-Venture for sharing intellectual property.

  • Securitizing loan portfolios of banks.

  • Securitizing financial assets such as auto loans, credit card and hire purchase receivables, finance leases, aircraft operating leases, real estate mortgages.

  • Owning, transferring or financing a single asset with its associated permits and contract rights (such as an aircraft, a ship, a building or a factory).

  • Separating different layers of equity infusion in complex financings.

  • Protection from tax or legal consequences of the activities of the SPV (reinvoicing subsidiaries and offshore insurance companies).

Many SPVs are incorporated in countries such as the Cayman Islands, The Channel Islands, Luxembourg, etc.

Establishing a Special Purpose Vehicle. Process

The process of creating a special purpose vehicle is typically handled by lawyers and accountants who specialize in this type of activities. They provide specialist know-how to ensure that the entire process to set up the SPV is handled in a way which complies with the applicable laws.

Because an SPV is a legal entity, the exact laws, rules and/ or guidelines that are applicable will differ per jurisdiction.

Also called Special Purpose Entity or Special Purpose Corporation.

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Compare with: Tax Haven  |  Joint-Venture  |  Start-up Company  |  Ring Fencing  |  Acquisition Integration Approaches  |  Strategic Alliance  |  Spin-Off  |  Divestiture

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