Setting up a Special Purpose Vehicle (SPV) Entity in Singapore
Introduction
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Special Purpose Vehicle (SPV) — Sometimes called a Special Purpose Entity (or SPE) — is a corporate structuring tool that allows an organization to transfer or isolate risk, secure financing, and meet other critical business goals. An SPV is typically used for a narrowly circumscribed business objective or project.
While SPVs are well understood within the finance and real estate sectors, not every organizational leader is fully familiar with the features, benefits, and other considerations related to these structures. This article will explain how SPVs work, situations where they are commonly used, how to set up one, and other relevant details.
What is a Special Purpose Vehicle?
A Special Purpose Vehicle is a company created for a specific, narrow purpose by the originating company or investors, often for a limited period, although this is not a prerequisite. Such purposes can include investing, securitisation of certain business transactions, risk isolation of a project, mergers and acquisitions, etc.
The SPV is usually a subsidiary of the originating company, and as a separate legal entity with its own balance sheet. This subsidiary company is quarantined from the financial risks attached to its parent firm. Its legal status as a separate entity isolates its assets and liabilities from those of the parent. In particular, an SPV structure makes its obligations secure for its creditors, even if the parent company goes bankrupt. A properly collateralized SPV can therefore have a significantly higher credit rating than its parent company and thereby obtain better financing terms.
Alternatively, in certain cases, the SPV may be created as a holding company. In this case, the equity of the subsidiary companies adds to the credit-worthiness of the SPV but the liabilities of any subsidiary are not transferred to it. For all these reasons, a Special Purpose Vehicle is sometimes called a Bankruptcy Remote Entity (BRE). But not all SPVs are BREs. A BRE is always an SPV, but it has additional features that an SPV does not necessarily have. As an example, a BRE must have at least one “independent director” who is not associated with the borrower. Such an independent director can then approve or disapprove a borrower’s bankruptcy filing. Finally, it is important to note that SPVs and BREs are not “bankruptcy proof” entities, as such a structure would be against public policy as it would violate a debtors right to avail the bankruptcy process.
Most Singapore SPVs are created in the form of a private limited company (see how to create a private limited company in Singapore).
Who Should Set up an SPV?
An SPV can be appropriate in many situations. Some of these are described below.
Startup Companies
Historically, Special Purpose Entities were used in the investment fund industry. But in the past few years, this structure has become popular in Singapore for startup ventures. This is because startups need funding that can be obtained more easily and securely through an SPV. Using a Singapore SPV when creating a startup can have numerous benefits:
- An SPV can provide the platform through which investors put money into and receive equity in startup companies;
- Through an SPV, investors can create syndicates, through which a significant amount of money can be collected and invested in a startup;
- Through the same SPV, the startup will need to deal with only one company instead of a larger number of investors; and
- The startup can attract a larger number of investors willing to put money into a project through a SPV.
Better Financing Terms
If a company raises funds by allowing individual investors to buy shares, it would potentially have to deal with the concerns of every new shareholder over how the company operates, which could be time-consuming and even overwhelming. An SPV can allow the company to avoid this and liaise with only one new investor (the SPV company), as opposed to dozens of investors. The investors invest in the SPV, which in turn invests in the startup. This can be an important consideration for the founders of a startup where the decision-making process involves technical expertise that ordinary investors do not possess (e.g. engineering or medical companies). The managers of such companies would wish to limit unnecessary influence from investors who are not sufficiently informed; an SPV structure can enable that.
Risk Segregation
A Singapore SPV may offer an investor the opportunity to allocate money for just one specific project, thereby segregating its risk.
In addition, if the company structures its SPV such that the SPV has its own assets which investors have access to, investors have the security that their investment is protected by some tangible collateral. Traditionally, investors in a company may not be able to recover assets if the company becomes insolvent, because other stakeholders (e.g. employees or banks) may have a prior claim on those assets. However, investors who have contributed funds to a properly structured SPV may be able to make a claim against the SPV’s assets even if the related company itself becomes insolvent. This additional protection may provide a stronger incentive to prospective investors and allow the SPV to obtain funds on better terms.
Similarly, risk mitigation is another reason for creating an SPV. Parent organizations can legally quarantine higher-risk assets through an SPV and protect the parent from the risk of the SPV going bust.
Asset Transfer
SPVs can enable easier asset transfers. For example, permits to operate assets (such as a power plant) are difficult, or even impossible, to transfer. But the permits can be held by an SPV in a subsidiary structure that owns all assets and relevant permits, eliminating the need to transfer permits. When a sale has to be made then the SPV is sold as a single, self-contained package.
Securitization by Banks or Insurance Companies
Such institutions often set up SPVs because they offer simpler operation of securitized assets. For example, a bank may wish to issue a mortgage-backed security whose payments come from a pool of loans. However, to ensure that the holders of the mortgage-backed securities have the first-priority right to receive payments on the loans, these loans need to be legally separated from the bank’s other obligations. This is done by creating an SPV and then transferring the loans to it from the bank.
Reduction of Regulatory Burden
By creating SPVs, onerous regulations can sometimes be avoided. For example, laws requiring owners of certain assets to be registered or headquartered within particular jurisdictions can sometimes be sidestepped by creating an SPV in the necessary jurisdiction. Such an SPV can then hold the relevant assets without having to transfer all the operations of the parent to that jurisdiction.
Companies Wishing to Protect Intellectual Property
SPVs can be used to protect intellectual property in situations where it may be vulnerable. For example, a new subsidiary can be created to own IP, preventing the parent company's pre-existing licensees from accessing the IP through any prior licensing deals.
This is not an exhaustive list of structures and purposes where the SPV can be used. The SPV is a very versatile tool that can be created and adjusted to suit your particular needs.
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SPV Regulations in Singapore
In nearly all cases, a Singapore SPV is incorporated in the form of a Private Limited Company, so all legislation applicable to this type of entity will apply to the SPV. When opening an SPV in Singapore, the following laws and regulations must be followed:
- The Companies Act governs all corporate entities such as a Private Limited Company;
- The Banking Act is also relevant when an SPV is used by banks for financial transactions;
- The Securities and Futures Act governs the issuance of securities, a common financial instrument related to SPVs. It will be applicable, for example, to fundraising startups that use an SPV and issue securities.
- The Income Tax Act applies to all entities operating in Singapore. It must be noted, however, that SPVs are subject to slightly different taxation and accounting requirements compared to other Singapore companies.
- The Bankruptcy Act regulations apply to the dissolution of an SPV.
Note that there are many other laws and regulations applicable to your vehicle, depending on the type of activities it will engage in. Please contact our specialists to make sure your SPV is incorporated and operated in accordance with Singapore laws.
Steps for Creating an SPV in Singapore
Step 1. Develop the appropriate business structure
First of all, you must clearly understand the purposes for which you want to create the SPV. This will determine the necessary business structure. For example, your SPV may be a subsidiary company owned by the originating entity for fundraising purposes, or it may be a holding company controlling several businesses that intend to merge, etc.
Step 2. Incorporate your SPV(s)
Once you have a plan for the business structure, you can proceed with incorporating one or more SPVs, as required by your structure.
An SPV will usually be structured in Singapore as a Private Limited Company (a company) — an entity where shareholders’ liability is limited by the cost of shares.
Your SPV, structured as a company, may be owned by a minimum of 1 and a maximum of 50 shareholders, who can be natural persons or corporate entities, either local or foreign. You may find the full list of registration requirements and details of the incorporation process in our article on Singapore Company Registration requirements.
As part of the SPV’s incorporation procedure with the Accounting and Regulatory Authority of Singapore, you will be required to create a company constitution. The company constitution is a document that specifies the regulations for a company's operations and defines its purpose. In addition to the ordinary provisions contained in the Private Limited Companies’ constitutions, that of an SPV should include the business structure the SPV is involved in, SPV’s functions as well as the specific objects. Objects are likely to be determined via a discussion with all stakeholders, and would be linked to the strategy agreed for the transaction. Unlike ordinary companies, where the object clause usually indicates the type of business the company wishes to carry out, the intention of receipt and distribution of profits, that of the SPV usually states the particular purposes and functions of the SPV in the business structure. Besides, if such a company is created for a specific project and a limited period of time, the company constitution should reflect this operating period and describe the relevant winding up procedure.
Apart from the existing requirements for incorporating a company, there are no additional regulatory requirements to fulfil when setting up an SPV.
Accounting and Tax Considerations for an SPV
Taxes
If your SPV is incorporated as a company, it will be taxed at the corporate tax rate of 17% on its chargeable income, subject to the tax incentives available for qualifying companies. For a more detailed overview, see our Singapore corporate tax guide.
Among the specific tax regulations applicable to Singapore Special Purpose Vehicles are those related to the Goods and Services Tax. In certain cases qualifying SPVs are exempt from the GST. For example, Real Estate Investment Trusts (“S-REITs”) listed on the Singapore Exchange (SGX) and their SPVs are granted a GST concession to claim GST incurred on business expenses.
SPV may be required to pay the stamp duty for the execution of various documents related to properties and shares. Singapore SPVs may also be subject to withholding taxes on interests and royalties when those are paid to a non-resident.
Accounting
SPVs are subject to the standard annual filing requirements as applicable to Singapore private limited companies.
However there are certain special cases. If, for example, the SPV is set up by a Singapore company that is listed on the SGX, such a company may have to include the assets and liabilities of its SPV in its own financial statements, even though the two are separate entities. Such a consolidation of financial statements is mandatory if the company meets all the following criteria:
- It has control over the SPV;
- It has exposure or rights to variable returns from its involvement with the SPV;
- It is able to use its power over the SPV to affect its returns.
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