Special purpose vehicle (SPV)

What it means

A special purpose vehicle, or SPV, is a separate legal entity set up for a single, precisely defined purpose: carrying out a project, owning a specific asset or completing a transaction. In Slovakia it is most often an s. r. o. owned by a parent company, a group of investors or partners in a joint project.

The main reason is ring-fencing risk. The SPV's liabilities belong to the SPV, not its owners, so a failed project does not endanger the rest of the group, and problems at the parent need not spill over into the project. This matters to banks financing the project, which want certainty that its cash will serve only to repay the loan.

SPVs are also used because they make a later sale easier. Instead of transferring a property with fees and a complex process, the ownership interest in the SPV that owns it is sold. In corporate groups, SPVs form part of the structure beneath a holding company.

How it works in practice

Typical uses are a development project, where the SPV buys land, builds and sells flats, or an investment property the SPV owns and lets. Other uses include acquisitions, where the buyer sets up an SPV that takes a loan and buys the target, and joint ventures between several partners.

In project finance, banks require the SPV to have no other activity and restrict it contractually: no further borrowing, no dividends unless covenants are met, charges over assets and shares. Owners often guarantee completion of the project or cover cost overruns.

For accounting and tax, an SPV is an ordinary company with its own books, tax return and obligations. Within groups, transfer pricing between the SPV and the parent must be addressed, for example for loans or management services, and on a sale of the SPV the tax consequences for the seller too.

What to watch out for

Risk separation is not absolute. If the parent or its directors interfere with the SPV in ways that harm creditors, they may become liable for its debts, for example by abusing limited liability or improperly stripping assets. The SPV must operate as a genuinely independent company with its own decisions and documentation.

When buying an SPV holding property, the buyer takes on its whole history: liabilities, tax risks, contracts and disputes. Thorough due diligence of the company itself, not just the property, is therefore essential, together with contractual warranties from the seller covering hidden liabilities.