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Questions You Must Ask about SPV Compliance

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Questions You Must Ask about SPV Compliance

Special Purpose Vehicles (SPV) or SPE (Special Purpose Entities) are regular conversations in financial circles. This is even more so due to the frequent occurrence of the financial crisis on a global scale. 

When businesses expand their operations, many prefer to do so by way of an SPV to offset any risks from the parent company’s balance sheet. They need to follow various compliance regulations such as IFRS, U.S. GAAP, and BASEL III.

With these answers to common SPV compliance questions, you can get an in-depth understanding of how to set-up and run an SPV. 

Which Regulatory Authorities Monitor SPV Compliance?

The regulatory authorities that monitor the SPV compliance will depend on the accounting standards used by the entity. For example, if the balance sheet is being prepared using the U.S. Generally Accepted Accounting Principles (U.S. GAAP), the SPV will follow these compliance rules.

BASEL III is a more global regulatory standard, and it is appropriate for multinational companies with SPV’s in different countries. 

Can The SPV get Overseas Tax Benefits?

Since an SPV is a separate entity from the parent company, its tax calculations vary. If the SPV is set up in a different country than the parent company, it will follow the host country’s taxation procedures. For example, if a U.S. based company has an SPV in the Cayman Islands, then the subsidiary will get a tax holiday of 20 years. 

How Can One Structure an SPV In Different Countries?

Multinational companies have SPVs operating in more than one country at a time. So, understanding how they need to be structured is critical. In Canada, a SPVis set up as a charitable trust. According to the Income Tax Act, Canada, charitable trusts operating for exclusively charitable purposes are exempt from paying tax. 

In the U.S., an SPV is created in compliance with the LLC regulations. Therefore, it will have to file an annual report according to the state laws. If the SPV is formed in the E.U., it will follow the regulatory guidelines of a Limited Purpose Corporation as per the U.K. rules. By getting answers to common SPV compliance questions, you can be assured that you are not in violation of any laws. 

Does The Customer Due Diligence (CCD) Rule Apply To SPVs?

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In May 2016, FinCen issued a directive applying the CCD rule to covered financial institutions. It requires the institution to identify and confirm the beneficial owners of a subsidiary legal entity. Since SPVs are either an LLC, L.P., or trust, they are governed by the CCD rules. 

What Are The SPVs Excluded From “Legal Entity Customers”?

The FinCen excludes 19 types of SPVs from the “Legal Entity Customer,” in the CCD rule. These exemptions were given because either the entity operates in an industry that is heavily regulated, and discloses its own as part of their regulatory filing, or, their beneficial ownership details are available via other credible sources. 

SVPs and other off-balance sheet vehicles continue to play a vital role in the corporate world. Their regulatory framework is subject to change from time to time. The answers to common SPV compliance questions give a better understanding of how they can be structured to ensure they meet all the regulatory requirements. 

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