Special purpose company

A special purpose company  (SPC, 특수목적회사/特殊目的會社) is a company-type legal entity created to fulfill specific or temporary objectives. SPC is otherwise called special purpose entity (SPE) or, especially in Europe, special purpose vehicle (SPV, 특수목적기구/特殊目的機構).

SPCs are typically used by companies to isolate the firm from financial risk. They are also used to hide debt or ownership, and obscure relationships between different entities which are in fact related to each other.

In Korea, a number of SPCs were created in order to overcome the international banking crisis in 1997. The Korean government allowed a variety of paper companies being established for a certain purpose, i.e., corporate restructuring, securitization, etc. Previously this kind of paper companies had been more often than not regarded as illegal for tax evasion. As regards actual cases on SPCs, refer to SPC (case).

Key words
SPC, SPV, AMC, corporate restructuring, conduit

Histrorical background
In November 1999 in the midst of the so-called IMF Crisis, the Financial Supervisory Commission (currently the Financial Services Commission) asked for a feasibility study to Arthur Anderson how to introduce corporate restructuring vehicles to the Korean legal regime.

This idea was introduced by advisors from the International Monetary Fund (IMF), and the considerable amount of consulting fee was financed by the technical support loan provided by the World Bank.

In this connection, SPCs for the bankruptcy remoteness purpose were encouraged to facilitate the securitization of non-performing assets of insolvent financial institutions.

SPC as a Paper Company
At first, an SPCs was out of the conventional Korean legal system because it is not a real entity with nominal capital and only one representative. Sometimes, it was called a "ghost company" for illegal purposes including tax evasion. But the IMF Crisis has totally changed such an legal posture.

How come should such SPC be acknowledged as a legal entity? SPC is entitled to be granted a coporate entity as a juristic person on the following grounds:
 * SPC is legally useful to fulfil the purpose of bankruptcy remoteness or non-recourse financing;
 * For the efficient corporate restructuring, a number of SPCs are in need. So investors are allowed to easily dispose of their ownership and gain profits after the goal is attained;
 * SPC is well under the effective supervision and regulation of the authorities concerned by means of stock trading and corporate governance;
 * SPC is operated and supported by AMCs, trustees and other specialists, which are conducive to the transparent and professional management of funds, and effective risk management;
 * SPC is necessary to prevent moral hazards of creditors and investors of non-performing assets;
 * SPC is also useful to save costs and expenses, and tax levies as a qualified conduit

General Uses of SPCs
Wikipedia illustrates some of the reasons for creating special purpose entities (SPEs):
 * Securitization: SPEs are commonly used to securitise loans (or other receivables). For example, a bank may wish to issue a mortgage-backed security whose payments come from a pool of loans. However, to ensure that the holders of the mortgage-back securities have the first priority right to receive payments on the loans, these loans need to be legally separated from the other obligations of the bank. This is done by creating an SPE, and then transferring the loans from the bank to the SPE.
 * Risk sharing: Corporates may use SPEs to legally isolate a high risk project/asset from the parent company and to allow other investors to take a share of the risk.
 * Finance: Multi-tiered SPEs allow multiple tiers of investment and debt.
 * Asset transfer: Many permits required to operate certain assets (such as power plants) are either non-transferable or difficult to transfer. By having an SPE own the asset and all the permits, the SPE can be sold as a self-contained package, rather than attempting to assign over numerous permits.
 * For competitive reasons: For example, when Intel and Hewlett-Packard started developing IA-64 (Itanium) processor architecture, they created a special purpose entity which owned the intellectual technology behind the processor. This was done to prevent competitors like AMD accessing the technology through pre-existing licensing deals.[citation needed]
 * Financial engineering: SPEs are often used in financial engineering schemes which have, as their main goal, the avoidance of tax or the manipulation of financial statements. The Enron case is possibly the most famous example of a company using SPEs to achieve the latter goal.
 * Regulatory reasons: A special purpose entity can sometimes be set up within an orphan structure to circumvent regulatory restrictions, such as regulations relating to nationality of ownership of specific assets.
 * Property investing: Some countries have different tax rates for capital gains and gains from property sales. For tax reasons, letting each property be owned by a separate company can be a good thing. These companies can then be sold and bought instead of the actual properties, effectively converting property sale gains into capital gains for tax purposes.

Types of SPCs
In Korea, SPCs have been created as a juristic person by relevant special acts for a certain purpose as explained below:
 * SPC for asset-backed securitization (ABS) is established by the Act on Asset-Backed Securitization (Article 2 v) to ensure bankruptcy remoteness of underlying assets which shall be transferred to SPC;
 * Corporate restructuring company (CRC) is to avoid double taxation and diversification of risks by establishing a restructuring-specialized company. Generally tax benefit to avoid double taxation should be granted by the Special Tax Treatment Control Act
 * Real Estate Investment Trust Companies (REITs) is allowed by the Real Estate Investment Company Act (REITs Act) so as to invest and lend monies to real estate developers;
 * Special Purpose Acquisition Company (SPAC) is to facilitate the M&A process of a listed companies. SPACs are established pursuant to the Enforcement Decree of the Capital Markets Act so as to protect investors. SPACs are exempted from the regulation regarding collective investment scheme.
 * SPC for project financing is to secure non- or limited recourse financing by empowering SPC to borrow funds necessary for the project; or
 * SPC for leveraged lease is to apply for tax reduction or exemption by establishing SPC at a tax haven.