In the area of start-ups and venture capital investments, project companies, also known as special purpose vehicles (SPVs), are a proven instrument for legally and economically isolating specific projects or business areas. These structures make it possible to steer investments in a targeted manner, minimize risks and clearly separate the interests of investors and founders. But what are the specific advantages of SPVs? What legal and tax challenges need to be considered? And why are they particularly attractive for investors? This article examines the legal and economic relevance of SPVs in the start-up sector, highlights typical problems and provides an overview of possible solutions – particularly with regard to tax optimizations such as the formation of a tax group. The aim is to provide founders and investors with a sound basis for deciding whether and how such a structure can be sensibly integrated into their corporate strategy.
What are project companies or SPVs?
Project companies or special purpose vehicles (SPVs) are legally independent companies that are set up specifically to implement a certain project or manage a certain asset. In the start-up context, they are often used to separate individual business areas or projects from the main company both organizationally and financially. This enables a clear allocation of risks and returns as well as the targeted participation of investors. Example:
A technology start-up develops a new software solution and establishes a separate GmbH as an SPV for this purpose. This company is used exclusively for the development, marketing and financing of the software. Investors can participate directly in the SPV without influencing other business areas of the start-up. SPVs can be established in various legal forms, including GmbHs or Limited Partnerships (LPs), depending on the specific requirements of the project and the legal framework of the country. This flexibility allows startups to choose the optimal structure for their individual needs.
Why are companies structured in this way?
The formation of SPVs offers numerous advantages – for both founders and investors:
Risk limitation
By outsourcing a project to an independent company, the economic risk is limited to this sub-area. If the project fails, the main company remains unaffected. Example:
A start-up in the renewable energy sector founds an SPV for the construction of a wind farm. In the event of delays or financial problems, the parent company is not directly liable. Risk limitation through SPVs is particularly valuable in sectors with high uncertainties or long development cycles, such as biotechnology or infrastructure projects.
Targeted participation opportunities
Investors can invest specifically in an individual project or business area without having to acquire shares in the entire company. This makes it easier to raise capital for innovative projects with high potential. Example:
A venture capital fund invests in a startup’s new product via an SPV because it considers the market potential of this product to be particularly promising. This structure also enables smaller investors to participate in projects that might otherwise be beyond their reach.
Tax optimization
SPVs can offer tax advantages, especially if they are integrated into a tax group. This allows profits and losses to be offset within the group of companies. Example:
A start-up with several subsidiaries uses a tax group to offset losses from an SPV against the profits of the parent company and thus reduce the tax burden. In addition, SPVs can be used to benefit from specific tax incentives or support programs that apply to certain industries or projects.
Transparency and structure
SPVs create clear structures for investors and facilitate the evaluation of individual projects. This is a decisive advantage, particularly in the case of complex company models. Clear structures also help to better fulfill regulatory requirements and maintain an overview of financial obligations and income.
Challenges in the establishment of SPVs
Despite their advantages, SPVs also present challenges:
Formation costs
Setting up an SPV requires legal advice as well as administrative expenses for the establishment and ongoing management of the company. These costs can be a hurdle for smaller start-ups. Solution:
Costs can be reduced through standardized processes, such as the use of proven contract templates or digital tools to manage the company. Careful planning of the incorporation phase can help to avoid unnecessary expenditure and ensure that all legal requirements are met efficiently.
Complexity of the administration
Operating several legal entities inevitably leads to increased administrative expenses – particularly with regard to accounting, tax returns and compliance requirements. Solution:
Central administration within a tax group can help to minimize the effort and exploit synergies between the companies. The use of specialized administrative service providers can also help to reduce complexity and ensure that all legal requirements are met.
Regulatory requirements
Depending on the type of project, there may be additional regulatory requirements – such as prospectus obligations when raising capital or industry-specific requirements. Solution:
A careful legal review in the run-up to formation helps to identify regulatory risks at an early stage and take appropriate measures. Regular compliance checks are important to ensure that all activities of the SPV are in line with the applicable regulations.
Tax optimization through tax groups
A tax group offers start-ups the opportunity to offset profits and losses between the parent company and subsidiaries. This is particularly advantageous if individual SPVs generate losses in the initial phase, while other areas of the company are already generating profits. Requirements for a tax group:
– There must be a profit transfer agreement between the parent company (controlling company) and the subsidiary (controlled company).
– The controlled company must be financially integrated into the company.
– The profit transfer agreement must remain in place for at least five years. Example:
A start-up with several SPVs uses a tax group to offset losses from a research project against profits from an established product area. This reduces the tax burden of the entire company. The use of a tax group can also help to increase the financial stability of the entire group of companies and to be able to react flexibly to economic changes.
Why are SPVs attractive for investors?
SPVs offer several decisive advantages for investors:
Focused investments
Investors can make targeted investments in projects that match their risk profile or whose potential they see as particularly promising – without having to participate in other areas of the company. Example:
An investor invests in a startup’s new AI project via an SPV because he sees this area as having a promising future, while other business areas of the company are not of interest to him. This ability to focus makes it easier for investors to strategically align their portfolio and take advantage of specific market opportunities.
Transparency
SPVs enable a clear separation of risks and returns of individual projects. This makes it easier for investors to evaluate their investment and creates confidence in the structure of the company. Transparency is a decisive factor in due diligence by potential investors and helps them to make informed decisions about investments.
Flexibility in the exit strategy
Investors often have more flexibility when selling their shares in an SPV compared to investing in the company as a whole. This flexibility can be particularly attractive for investors with specific time horizons or return targets.
Conclusion: Project companies as a strategic instrument
Project companies or SPVs are a proven means of structuring start-ups – be it to limit risk, to target investors or for tax optimization. Despite the associated challenges, they offer considerable advantages for both founders and investors. As a lawyer specializing in corporate law, I support start-ups in the legally compliant formation and administration of SPVs as well as in the design of tax-optimized structures such as tax groups. Careful planning is essential in order to minimize both economic and legal risks at an early stage – because this is the only way to successfully implement innovative projects! Through tailor-made advice, I help to ensure that all legal framework conditions can be optimally utilized – be it through efficient contract design or comprehensive compliance solutions – in order to exploit the full potential of your entrepreneurial vision.
