Orphan structure
Orphan structure or Orphan SPV or orphaning are terms used in
Description
In an orphaned SPV, the
The driver for orphaning is to enable the
Orphaned SPV structures allow lenders to separate the asset finance, from the asset user(s), thus enabling them to move the asset to other users(s) should the situation arise (e.g. bankruptcy of a user), without having to recreate a new SPV and/or reraise new loans.
Orphaning is at the heart of global
An orphaned SPV is, by definition, an artificial creation as everybody knows who "controls" the SPV. There are instances outside of
Owners
The SPV is generally a limited liability company issued in either an offshore location (i.e. the Cayman Islands SPV) or an onshore location (i.e.
The key considerations in deciding what 3rd party entities are used to "own" the orphaned SPV equity are driven by:
- Tax Integrity. The 3rd party must be credible, and legally separate from all other parties in the SPV, that the various national taxing authorities won't challenge the SPV under general anti-avoidance rules, and effectively force it back "on-balance sheet", rendering the SPV useless to the parties.
- Bankruptcy Remoteness. The SPV lenders will want to ensure their securitisation vehicle is prevented from entering into a bankruptcy process thus losing control over the assets for an extended period, due to financial failings of the asset user(s), or the 3rd party equity owner itself. The lenders will want to take immediate control of the assets if a user(s) goes bankrupt[6]
- Conflicts/Control. The 3rd party must not be capable of damaging or attacking the SPV, taking a biased view on behalf of one party (i.e. lender or user) outside of the written agreements created on establishing the SPV, or even acting in a completely rogue manner, that would harm the interests of the main parties in the SPV.
Given the above, the orphaned SPV equity is usually held by a nominee share trustee company on trust pursuant to a Declaration of Trust (and never via an individual).
Specialist law firms provide such trust services (can often be a subsidiary of the law firm advising on the main SPV and/or securitisation transaction).[7]
Often only a small number of shares are created for a nominal sum (the exact specific amounts depending on the specifics of the jurisdiction) as the "equity" of the SPV. These shares are then independently purchased by the 3rd party entity in question using their own funds to complete the purchase (cannot be paid for directly by the main parties).
Some jurisdictions have used
The Non-Charitable Purpose Trust is emerging as a preferred option in some jurisdictions.[12]
Abuses
The global
Unfortunately, the global acceptance of the main orphaned SPV structures has attracted the attention of users who are not seeking to conduct standard tax-transparent
- In 2016, it was discovered that US
- In 2017–2018, academic research by Professor Jim Stewart in
Ireland is the largest EU location for orphaned SPVs,[21] and the above abuses have drawn warnings from the former Deputy Governor of the Central Bank of Ireland[22][23]
See also
- Irish Section 110 SPVs
- Purpose Trusts
- Bankruptcy Remoteness
References
- ^ "Creating and Understanding SPVs" (PDF). PwC. 2012.
- ^ "Cayman Islands Orphan SPVs in Shipping" (PDF). Walkers. January 2017.
- ^ "SPV Taxation" (PDF). Grant Thornton. September 2015.
- ^ "Cayman Islands Securitisations" (PDF). Conyers Dill Pearman. 2016.
- ^ "Establishing SPVs in Ireland" (PDF). Arthur Cox. 2014. Archived from the original (PDF) on 2018-03-16. Retrieved 2018-03-14.
- ^ "Orphan structures – bankruptcy remoteness under Irish law". Global Law Office. 2017.
- ^ "Jersey Orphaned SPVs" (PDF). Hatstone Law. 2014.
- ^ "Law Firm Matheson Uses Irish Charities to help Hedge Funds cut tax". Irish Times. 27 August 2015.
- ^ "Vulture funds using Matheson Law Firm in-house charities to avoid paying Irish tax, says TD Stephen Donnelly". Irish Times. 14 July 2016.
- ^ "Irish Charities Regulator rejects Matheson Charities in Section 110 SPVs". Irish Times. 28 April 2017.
- ^ "Stephen Donnelly Welcomes Charity Regulator Clampdown on Section 110 Charities". Fianna Fail. 27 April 2017.
- ^ "Non-charitable purpose trusts in Guernsey". Lexology. 2014.
- ^ "Global Securitisation Market" (PDF). Morgan Stanley. 2017. Archived from the original (PDF) on 2018-03-17. Retrieved 2018-03-14.
- ^ "Orphan structures: holding companies accountable when owners don't exist". Open Global Rights. 2 August 2017.
- ^ "Ireland confronts another tax scandal closer to home". Financial Times. 11 September 2016. Archived from the original on 2022-12-11.
- ^ "Loophole lets firms earning millions pay €250 in Tax". The Irish Times. 6 July 2017.
- ^ "NAMA forced to pay €160m tax bill after Section 110 loophole closed". The Irish Independent. 2 February 2017.
- ^ "Global Finance and the Russian Connection" (PDF). Professor Jim Stewart Trinity College Dublin. 27 February 2018.
- ^ "How Russian Firms Funnelled €100bn through Dublin". The Sunday Business Post. 4 March 2018.
- ^ "More than €100bn in Russian Money funneled through Dublin". The Irish Times. 4 March 2018.
- ^ "Ireland is top Eurozone jurisdiction for SPVs". Irish Independent. 19 August 2017.
- ^ "Former Regulator says Irish politicians mindless of IFSC risks". The Irish Times. 5 March 2018.
- ^ "Irish SPVs more a worry for other countries than State". The Irish Times. 13 January 2017.