Setting Up a Special Purpose Vehicle (SPV) in Singapore

A Special Purpose Vehicle (SPV), also referred to as a Special Purpose Entity (SPE), is a company or organization solely created to execute a certain project or to achieve a specific business goal. This corporate structuring method is often employed by companies to manage or isolate potential risks, secure funding, and achieve business objectives.

The company created as an SPV is often meant to last for only a limited period of time. It’s considered a subsidiary of the original company but a separate entity with its own legal status. As such, the SPV's assets are maintained separate from the parent company's assets. 

Why Do Companies Set Up SPV Companies?

Limited Financial Risks

The main purpose of SPV companies is to legally reduce and isolate financial risk. This is often done in cases of high-risk investments or business decisions, as well as financial transactions. 

An SPV is protected from the debts of the parent company and is used to reduce negative financial impact through risk sharing. This may also attract more angel investors as they will feel much more comfortable associating with an SPV headed by an experienced manager.

Debt Securitization

Companies may opt to consolidate future accounts receivable from various sources into one group to sell to investors or other companies. This can be done through an SPV, in which the parent company delegates its future cash in-flows, and sells to interested parties.

Banks and financial institutions may create SPV companies for debt securitization of mortgage-backed securities and loans, which the buyer may then convert the loans into marketable security.

Property Sale

Companies may also create SPVs to minimize the property sales tax of a sold property. If the property sales tax is higher than the capital gain of the sale, then a company may opt to set up a special purpose vehicle, or SPV, to register the properties under the SPV company.

The parent company may then sell the SPV as a whole, including its properties, and pay taxes on the capital gain from selling the SPV instead of paying for property sale taxes. Besides properties, creating SPVs can also be done to sell other assets without having to pay taxes higher than capital gain.

Investment Pooling

Besides acting as a subsidiary company for the parent company, SPV companies are popular among the investment fund industry, as groups of venture capitalists tend to put up SPV companies to pool capital together to invest in an idea, company, or startup venture.

Asset Transfer

Some companies may consider transferring their assets to the SPV to make the selling of these assets much more convenient. By setting up an SPV that owns certain assets, the transfer process can be done easily through the selling of the SPV as a whole. 

Companies May Hide Losses

In Singapore, private limited companies, limited partnerships, and other companies looking to create special purpose vehicles must indicate the assets and liabilities of the latter on the financial statements of the parent company, particularly when the parent company is listed on SGX.

This is done to prevent companies from hiding toxic assets, debt burdens, and losses, and to avoid scandals that happen with SPVs in other companies, such as the Enron Scandal. Enron used SPVs to deceive investors into believing the company was profiting, hiding their debt and specific assets in SPVs. The scandal later led to the downfall of the Wall Street giant.

Who Can Create an SPV?

Limited partnerships, limited liability companies, financial institutions, trusts, corporations, real estate developers, individual investors, and more can create an SPV as the process doesn’t involve any special requirements and follows the incorporation process of a regular Singaporean company.

How to Set Up an SPV in Singapore

Step 1: Create the Business Structure

There are no special requirements to incorporate an SPV in Singapore, but you will need to assess your business structure first to understand if and how creating SPVs will help your business. In Singapore, only private limited companies, limited liability companies, and corporations may create SPVs.

Consider the business structure of the SPV: will the SPV act as a subsidiary for the parent company, or will it become a holding company for various businesses? Once you've narrowed down the objective and structure of the SPV, you can proceed with incorporation.

Step 2: Incorporate the SPV

In Singapore, an SPV acts like a private limited company, where the liability of each shareholder is limited by the amount they invested in the company. The SPV also follows the requirements of incorporating a private limited company, such as its number of shareholders (between 1 to 50 shareholders), resident director/s, corporate secretary, and the like.

Step 3: Create the Company Constitution

The Accounting and Corporate Regulatory Authority (ACRA) of Singapore requires SPVs to create their own company constitution, which indicates the objective, nature of business, and operations of the SPV. If the SPV was created for a limited time, such as with certain projects or transactions, then the document must also include the time frame in which the SPV operates.

Step 4: Wait for Incorporation

If all requirements and documents are submitted correctly, then you will simply need to wait for ACRA to approve your application. This may take anywhere from 1-5 days, which will give ACRA time to evaluate your application, and have related organizations review your documents. Once approved, the SPV may operate as per its objective.

Things to Keep in Mind When Starting an SPV

Building Investor Confidence

While there are many financial benefits associated with starting an SPV, it’s also important to know that you may have difficulty attracting and building investor confidence. Potential SPV investors may be worried that they will not have as much insight and influence on the company’s financial matters as they may not be invited to attend the company’s annual meetings, with these investors not being direct shareholders of the SPV.

As a way around this issue, SPV managers and directors can implement strategies that promote transparency and communication with investors, such as regular financial reports, investor briefings, and more.

Tax Implications

As SPVs undergo the same incorporation process as all other Singaporean companies, their chargeable income will be subject to the 17% corporate tax rate, along with other tax regulations like the Goods and Services Tax, stamp duty fees, and withholding taxes if specific criteria are met. 

However, this also means that certain SPVs that meet certain requirements will also be qualified to avail of certain tax incentives, as well as GST exemptions.

Accounting Implications

SPVs are also required to abide by the standard annual filing requirements just like every other private limited company in Singapore. There are also some cases when the originating company will have to include the SPV’s assets and liabilities in its financial statements even though these are two legally separate entities.

This will be the case if the originating company is listed on the Singapore Exchange (SGX), or if the company meets all of the following:

• The originating company controls the SPV
• The originating company is involved with the SPV and has the rights to variable returns
• The originating company can affect the returns of the SPV

Costs

While starting an SPV in Singapore involves a relatively affordable incorporation process, it’s important to keep in mind that starting an SPV under an existing company may incur additional legal and professional fees, along with administrative expenses for services like accounting and reporting.

Future Regulatory Changes

Future regulation changes may come with certain tax and regulatory implications to SPVs, so it’s important to stay updated with any changes and get professional advice to ensure that your SPV complies with all the relevant requirements.

Expand Your Business

When utilised properly, SPVs can help companies make risky decisions while limiting potential liabilities. However, SPVs may also be used for fraudulent cases and scandals, in which the reputation of the parent company may be tarnished.

Don't make a mistake when expanding your business, and choose to incorporate your company in Singapore with WealthBridge - we'll help you create your SPV properly, and securely! Expand your business the right way, and make incorporation simple with our corporate services.

Checking if special purpose vehicles are right for your company? Send us a message at WealthBridge, and we can discuss the pros and cons with you!