By Beijing JT&N Shanghai Office
Xu Haibo and Liu Dongming
As the wealth management of high-net-worth families in China becomes increasingly international, professional and trust-oriented, Special Purpose Vehicle (SPV) techniques have become one of the main tools for establishing offshore wealth management. The key for offshore wealth management is the selection of jurisdiction, setup of SPV, construction of assets control relationships and implementation and arrangement for cross-border investments. In addition, domestic entrepreneurs for cross-border asset restructuring are using SPV techniques, return investment, red chips listings, family inheritances, tax planning and international trade more often.
With the rapid development of offshore financial services, a growing number of offshore financial institutions have extended their businesses into the Chinese market. Offshore financial summits have also become meeting places for industry-wide cooperation and communication of offshore wealth management, thus offering various options for domestic enterprises and high-net-worth families in establishing foreign SPVs. The primary concerns are how to establish legally compliant SPV firms that are risk controllable and stay in line with company strategic needs. The authors, in terms of purpose, approach and risk control will clarify these concerns in this article.
一、Conventional Practice of Offshore SPV
Special Purpose Vehicle, also referred to as Special Purpose Entity or Special Purpose Company, have become increasingly popular in China. China has successively publicized two important documents concerning the management of cross-border investment and financing, return investment and foreign exchange settlements in documents HF (2005) No. 75 and HF (2014) No. 37. In these department regulations, SPV is referred to as Special Purpose Company and defined accordingly. Comparatively speaking, the People’s Republic of China’s State Administration of Foreign Exchange (SAFE) provides an extended interpretation on SPV in document No. 37: “Any overseas entities established directly or indirectly controlled by domestic residents with their legally held assets or equities from domestic entities or their legally held overseas assets or equities for the purpose of investment and financing” are called Special Purpose Companies.
To better understand this, we can analyze SPV in terms of its functions. Generally SPV is an “assets packer” or a “shell carrier”, by which particular assets are packed, isolated and restructured to form certain flexible and effective property control relations for the purpose of diversified cross-border operational management. This includes public listings, assets securitization, equity financing, and family wealth management.
Common Usage of SPV:
First, overseas indirect listings generally include backdoor listings or reverse mergers. The process of creating the shell company is to establish SPV in an offshore jurisdiction and complete red chip structure. Another practice is to use the newly established SPV to buy the shell company and then realize the addition of assets through return investment or contract interest arrangement (VIE). This is favorable for avoiding operational difficulties and approval procedures in overseas direct listing as well as to facilitate tax savings.
Second, offshore asset securitization is mainly realized by using the established overseas SPV to issue asset-backed securities (ABS), mortgage-backed securities (MBS), or real estate investment trusts (REITs) in international capital markets. For asset securitization, SPV is the packer for underlying assets. Underlying assets are packed, isolated, restructured, and evaluated, then sold after securitization. Overseas securitization of domestic assets will use SPV and Wholly Foreign Owned Enterprises (WFOE) to establish control relationships between domestic and overseas assets in the process of packaging.
Third, cross-border investments as well as mergers and acquisitions are common procedures in SPV investments. SAFE has further relaxed control over foreign exchange through Document No. 37 in 2014. This document advocates the liberalization of capital accounts and allows repatriation of funds by domestic enterprises to facilitate the expansion of cross-border business and scale of business. The sources of SPV assets or equities include overseas and domestic assets or equities held by domestic residents. The process of asset acquisitions also allows for controlled relationships between domestic and overseas assets that will be established via SPV and WFOE. In contrast, transactions such as financing, equity, and asset merger and acquisition will be performed by SPVs established overseas. Both the local legal conditions of the target company and the taxation for mergers and acquisitions shall be taken into consideration.
Lastly, family wealth management relies on the usage of SPV, which can be established via trust arrangement, followed by listing, financing, and holding of different industrial assets through multi-level SPVs. This has become the conventional practice for overseas family trusts. Clearly, it is of great importance for the conventional structure and legal protection of the family wealth to select suitable jurisdiction and then establish trust and SPV. Whether the trust can be effectively established and to what extent the judicial integrity is in SPV jurisdiction will have significant influence to the practice of family wealth management.
二、Essentials in Establishing Overseas SPV
In addition to dealing with the specific issues mentioned in the previous paragraphs regarding establishing overseas SPV, attention should also be paid to the tax policy in the jurisdiction, bank and business confidentiality policies. This is done regardless if the foreign exchange control is lenient, company registration documentation and information are highly confidential, legal conditions are sound or if the company governance structure itself is lenient. Generally, confidentiality, tax exemption, and no foreign exchange controls are the primary issues faced among domestic enterprises in establishing SPVs.
Currently, for Special Purpose Vehicles registered with offshore jurisdiction, it is not necessary for the registered company to be present in the jurisdiction. Therefore the company can carry out its operations directly from anywhere in the world. Geographically, offshore jurisdictions are mainly distributed in three regions: the Atlantic Ocean and Caribbean region near North and South America, Europe and the Far East and Oceanic regions. These regions are mainly characterized by stable political environments, sound legal systems, limited financial restrictions, zero or low-interest tax incentives, developed traffic and infrastructure as well as well-developed professional services. Some offshore financial centers, such as the British Virgin Islands, Cayman Islands, Jersey Island, Guernsey Island, the Bahamas, Bermuda Islands, Seychelles Islands, Samoa Islands and Isle of Man have adopted legal means to develop and nurture particularly lenient controlled economic zones, allowing people from all over the world to conduct international business in their territories.
Establishing an SPV generally requires the following documents:
三、Risks and Suggestions for Establishing Overseas SPV
Each offshore jurisdiction has different legal provisions and management systems. Selecting the most suitable SPV for particular transactions is often a major concern in establishing a Special Purpose Vehicle.
Today, the registration procedures to establish an SPV are very simple and can be performed by a professional agent without the applicant personally going to the registration office. However, there are certain risks that exist with SPV registration by an agent that needs to be understood before proceeding with this option. If the agent is poorly qualified or insufficiently resourced, he or she may fail to properly understand the applicant’s needs making the establishment of an SPV compliant business impossible. Furthermore, if the agent does not fully understand the laws in the offshore jurisdiction, unknown risks cannot be prevented and controlled. In recent years, various issues have occurred, which warn that if an SPV is not properly established in an offshore with a sound legal environment, the enterprise is at risk of incurring great loss of interests if any disputes arise.
Therefore, we suggest that you follow the following steps to insure a successful SPV incorporation:
