A Special Purpose Vehicle (SPV) is a legal entity that is formed for a well-defined, sole and narrow purpose.
It is generally a company formed to fulfill one or a group of narrow objectives by its promoters.
SPVs are generally formed to isolate a company’s assets or activities.
The activities or assets are distanced into the new entity, i.e., the SPV and so investors or lenders feel more comfortable.
It is basically a means to separate the risk and free up capital.
The SPVs and the sponsoring company (sometimes the parent company) are insured against the risk of bankruptcy.
SPVs are also used to securitize loans or any other receivables.
Other uses of SPVs include circumventing certain regulatory constraints, maintaining the confidentiality of intellectual property, property investing especially in countries that have different tax rates for property sale gains and capital gains.
Objectives of SPV are
Securitization – Banks create SPVs commonly to securitise loans.
Risk-sharing – SPV creation allows companies to legally isolate risks of a project.
Property sale – If the taxes on property sales are higher than that of the capital gain, a company can establish an SPV which will own the properties for sale. Then, it can sell the SPV instead of the properties and then pay tax on the capital gain instead of the property sales tax.
Asset transfer– If certain assets are hard to transfer, a company can create an SPV to own these assets. After that, the company can sell the SPV as a part of a mergers and acquisitions process.