A special-purpose entity (SPE; or, in Europe and India, special-purpose vehicle/SPV; or, in some cases in each EU jurisdiction, FVC, financial vehicle corporation) is a legal entity (usually a
limited company
In a limited company, the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. In a company limited by shares, the lia ...
of some type or, sometimes, a
limited partnership) created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk. A formal definition is "The Special Purpose Entity is a fenced organization having limited predefined purposes and a legal personality".
Normally a company will transfer assets to the SPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. SPEs are also commonly used in complex financings to separate different layers of equity infusion. Commonly created and registered in
tax haven
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
s, SPEs allow
tax avoidance
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdi ...
strategies unavailable in the home district.
Round-tripping is one such strategy. In addition, they are commonly used to own a single asset and associated permits and contract rights (such as an apartment building or a power plant), to allow for easier transfer of that asset. They are an integral part of public private partnerships common throughout Europe which rely on a project finance type structure.
A special-purpose entity may be owned by one or more other entities and certain jurisdictions may require ownership by certain parties in specific percentages. Often it is important that the SPE is not owned by the entity on whose behalf the SPE is being set up (the sponsor). For example, in the context of a loan
securitization, if the SPE securitization vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank's group for regulatory, accounting, and bankruptcy purposes, which would defeat the point of the securitization. Therefore, many SPEs are set up as
'orphan' companies with their shares settled on
charitable trust and with professional
directors
Director may refer to:
Literature
* ''Director'' (magazine), a British magazine
* ''The Director'' (novel), a 1971 novel by Henry Denker
* ''The Director'' (play), a 2000 play by Nancy Hasty
Music
* Director (band), an Irish rock band
* ''D ...
provided by an administration company to ensure that there is no connection with the sponsor.
Uses
Some of the reasons for creating special-purpose entities are as follow:
* Securitization: SPEs are commonly used to
securitize loans (or other receivables). For example, a bank may wish to issue a
mortgage-backed security
A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment b ...
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 other obligations of the bank. This is done by creating an SPE, and then transferring the loans from the bank to the SPE.
* Risk sharing: Corporates may use SPEs to legally isolate a high risk project/asset from the parent company and to allow other investors to take a share of the risk.
* Finance: Multi-tiered SPEs allow multiple tiers of investment and debt.
* Asset transfer: Many permits required to operate certain assets (such as power plants) are either non-transferable or difficult to transfer. By having an SPE own the asset and all the permits, the SPE can be sold as a self-contained package, rather than attempting to assign over numerous permits.
* To maintain the secrecy of intellectual property: For example, when
Intel
Intel Corporation is an American multinational corporation and technology company headquartered in Santa Clara, California. It is the world's largest semiconductor chip manufacturer by revenue, and is one of the developers of the x86 seri ...
and
Hewlett-Packard started developing
IA-64
IA-64 (Intel Itanium architecture) is the instruction set architecture (ISA) of the Itanium family of 64-bit Intel microprocessors. The basic ISA specification originated at Hewlett-Packard (HP), and was subsequently implemented by Intel in col ...
(Itanium) processor architecture, they created a special-purpose entity which owned the intellectual technology behind the processor. This was done to prevent competitors like
AMD
Advanced Micro Devices, Inc. (AMD) is an American multinational semiconductor company based in Santa Clara, California, that develops computer processors and related technologies for business and consumer markets. While it initially manufactur ...
accessing the technology through pre-existing licensing deals.
* Financial engineering: SPEs are often used in
financial engineering
Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathem ...
schemes which have, as their main goal, the avoidance of tax or the manipulation of financial statements. The
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
case is possibly the most famous example of a company using SPEs to achieve the latter goal.
* Regulatory reasons: A special-purpose entity can sometimes be set up within an orphan structure to circumvent regulatory restrictions, such as regulations relating to nationality of ownership of specific assets.
* Property investing: Some countries have different tax rates for capital gains and gains from property sales. Letting each property be owned by a separate company can mean a lower tax bill. These companies can then be sold and bought instead of the actual properties, effectively converting property sale gains into capital gains in order to pay less tax.
Types
Securitization
* A
real estate mortgage investment conduit A real estate mortgage investment conduit (REMIC) is "an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors" under U.S. Federal income tax law and is "treated like a partnership for Federal i ...
(REMIC), used for the pooling and securitization of
mortgage loan
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
s for
mortgage-backed securities
A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...
.
* A
financial asset securitization investment trust A financial asset securitization investment trust (FASIT) was a type of special purpose entity used for securitization of any debt and issuance of asset-backed securities, defined under section 1621 of the Small Business Job Protection Act of 1996, ...
(FASIT), a defunct entity used for securitization of any debt for
asset-backed securities
An asset-backed security (ABS) is a security whose income payments, and hence value, are derived from and collateralized (or "backed") by a specified pool of underlying assets.
The pool of assets is typically a group of small and illiquid asset ...
.
* An
Irish Section 110 Special Purpose Vehicle (SPV)
An Irish Section 110 special purpose vehicle (SPV) or section 110 company, is an Irish tax resident company, which qualifies under ''Section 110'' of the '' Irish Taxes Consolidation Act 1997'' (TCA) for a special tax regime that enables the ...
(S110 SPV), the largest SPV in the EU for
securitisation
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
.
Investment
* A
real estate investment trust
A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping cente ...
(REIT), a
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
designation for a
corporate entity
A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...
investing in
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
for the purpose of reducing or eliminating
corporate tax.
Establishment
Like a company, an SPE must have promoter(s) or sponsor(s). Usually, a sponsoring corporation hives off assets or activities from the rest of the company into an SPE. This isolation of assets is important for providing comfort to investors. The assets or activities are distanced from the parent company, hence the performance of the new entity will not be affected by the ups and downs of the originating entity. The SPE will be subject to fewer risks and thus provide greater comfort to the lenders. What is important here is the distance between the sponsoring company and the SPE. In the absence of adequate distance between the sponsor and the new entity, the latter will not be an SPE but only a
subsidiary company
A subsidiary, subsidiary company or daughter company is a company owned or controlled by another company, which is called the parent company or holding company. Two or more subsidiaries that either belong to the same parent company or having a sam ...
.
A good SPE should be able to stand on its feet, independent of the sponsoring company. Unfortunately, this does not always happen in practice. One of the reasons for the collapse of the Enron SPE was that it became a vehicle for furthering the ends of the parent company in violation of the prudential norms of corporate financing and accounting.
Abuses
Special-purpose entities were one of the main tools used by executives at
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
, in order to hide losses and fabricate earnings, resulting in the
Enron scandal of 2001. They were also used to hide losses and overstate earnings by executives at
Towers Financial Corporation
Towers Financial Corporation was a debt collection agency based in Manhattan.Allan Sloan (February 16, 1993)"THE SEC VS. STEVEN HOFFENBERG: A CASE OF LEANING FORTUNES AT TOWERS FINANCIAL?,"''The Washington Post''. Between 1988 and 1993, Towers Fina ...
, which declared bankruptcy in 1994. Several executives of the company were found guilty of securities fraud, served prison sentences, and paid fines.
Evergrande has also been accused of using off book SPE to hide debt.
Accounting guidance
Under US
GAAP
Gaap (also ''Tap'', ''Coap'', ''Taob'', ''Goap'') is a demon that is described in demonological grimoires such as ''the Lesser Key of Solomon'', Johann Weyer's ''Pseudomonarchia Daemonum'', and the Munich Manual of Demonic Magic, as well as Jacq ...
, a number of accounting standards apply to SPEs, most notably
FIN 46R that sets out the consolidation treatment of these entities. There are a number of other standards that apply to different transactions with SPEs.
Under
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
(IFRS), the relevant standard is IAS 27 in connection with the interpretation of SIC12 (Consolidation—Special-Purpose Entities). For periods beginning on or after 1 January 2013, IFRS 10 Consolidated Financial Statements supersedes IAS 27 and SIC 12.
See also
*
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional compani ...
*
FIN 46 (FASB ruling on consolidation of variable interest entities)
*
Instex, a special purpose vehicle intended to promote trade with Iran without using the US dollar and evade
sanctions against Iran
There have been a number of sanctions against Iran imposed by a number of countries, especially the United States, and international entities. Iran was the most sanctioned country in the world until it was surpassed by Russia following its inva ...
.
*
Irish Section 110 Special Purpose Vehicle (SPV)
An Irish Section 110 special purpose vehicle (SPV) or section 110 company, is an Irish tax resident company, which qualifies under ''Section 110'' of the '' Irish Taxes Consolidation Act 1997'' (TCA) for a special tax regime that enables the ...
*
Off-balance-sheet entity
*
Orphan structure
Orphan structure or Orphan SPV or orphaning are terms used in structured finance closely associated with creating SPVs ("Special Purpose Vehicles") for securitisation transactions where the notional equity of the SPV is deliberately handed over t ...
*
Special-purpose acquisition company
*
Special purpose private equity fund
A special purpose private equity fund (SPPEF) also called a special purpose private equity investment fund, is a legal entity, frequently a Limited Liability Company incorporated in the US state of Delaware, but it can be any type of corporation ...
, similarly named business term
*
Stichting
A ''stichting'' () is a Dutch legal entity with limited liability, but no members or share capital, that exists for a specific purpose. This form of entity makes it possible to separate functions of ownership and control. Its use has been pioneered ...
*
Structured investment vehicle
A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues. They are simple credit spread lenders, ...
*
Variable interest entity
Variable interest entity (VIE) is a term used by the Financial Accounting Standards Board (FASB) to refer to a legal entity with certain characteristics such that a public company with a financial interest in the entity is subject to certain financ ...
(VIE)
Notes
References
{{Authority control
Corporate finance