What is an SPV and what is its purpose?

• "We updated this article for you in 2025, as it's a topic you frequently return to." And it has been here since 2021. 

What is an SPV, and why should it interest you as more than just an acronym?

A Special Purpose Vehicle (SPV), or "společnost zvláštního určení" in Czech, is a separate legal entity established by a parent company for a single, specific, narrowly defined purpose. Its primary and most important task is to isolate financial and legal risk. 

Imagine it as a fleet of ships: if one ship (an SPV designated for a risky project) sinks, the rest of the fleet (the parent company and its other assets) remains safely afloat. This is why an SPV is often referred to as a "bankruptcy-remote entity," meaning it is resilient to the parent company's insolvency.

In addition to risk isolation, SPVs also serve other strategic goals, such as pooling capital from multiple investors for a specific investment, securitizing assets (where, for example, a loan portfolio is transferred to an SPV, which then issues bonds to investors based on it), or implementing projects as a joint venture. ARROWS regularly advises clients on structuring companies to achieve maximum risk mitigation.

Sources often state that establishing an SPV is "straightforward and simple," which, in the Czech environment where the s.r.o. (limited liability company) form is most commonly chosen, may only be true at first glance. However, this apparent simplicity is the biggest trap. It satisfies entrepreneurs who think that merely registering in the Commercial Register grants them an impenetrable shield. 

The true value and resilience of an SPV, however, do not lie in its establishment but in the careful and consistent adherence to corporate governance rules that prove its real separation from the parent company. It is precisely the neglect of these formalities that leads to situations where courts "pierce" this shield.

When is it worthwhile to establish an SPV? Practical scenarios from development, venture capital, and M&A

Developers commonly finance projects through SPVs to avoid endangering their core business, but recent court rulings concerning "special purpose companies" show that this protection is not absolute if the structure is abused – at ARROWS, our Prague-based team can explain exactly where the line is drawn.

The application of SPVs is broad and extends into key areas of modern business. Here are the most common scenarios where using an SPV is not only worthwhile but practically standard:

Development and construction projects:

This is the most common use of SPVs in the Czech Republic. A developer establishes a separate company, typically a limited liability company (s.r.o.), for each new project—be it a residential building, an office complex, or a logistics park. All risks associated with construction, such as budget overruns, disputes with suppliers, or unsuccessful unit sales, affect only this single SPV. The parent company and its other profitable projects are thus protected.

Furthermore, this model significantly simplifies financing, as the bank can accept only the assets of the specific SPV as collateral without claiming the assets of the entire group. ARROWS has extensive experience in preparing the complete legal documentation for such project financing.

Venture capital and angel investments:

Here, the SPV functions as an "investment vehicle" for pooling capital. Instead of twenty different investors entering a startup individually and complicating its ownership structure (cap table), they establish a joint SPV. This SPV then makes a single, clean, and transparent investment in the target company.

For the startup's founders, this means they deal with only one entity, and for smaller investors, it is a way to participate in larger and more attractive opportunities. ARROWS helps investors structure these SPVs and set up the relationships between partners.

Project finance and infrastructure:

For large infrastructure projects, such as the construction of power plants, solar parks, or projects under a PPP (Public-Private Partnership) scheme, establishing an SPV is standard. It is often created as a joint venture of several partners who share the risk and investment. All contracts, loans, and revenues flow through this single, transparent entity, which facilitates financial control.

Even the Czech state uses its own SPV, the State Investment and Development Company (Státní investiční a rozvojová společnost - SIRS), for implementing strategic investments. Thanks to the international network of ARROWS International, we are also able to assist with complex projects involving foreign partners.

Asset securitization:

Financial institutions use SPVs to transfer a portfolio of assets (e.g., mortgage loans) to them, thereby removing them from their balance sheets. The SPV then issues securities backed by these assets and sells them to investors, thus gaining liquidity and transferring risk. This is a complex transaction that the ARROWS team has experience with.

How to establish an SPV in the Czech Republic? A guide to a process that is more than just paperwork

Establishing an SPV in the Czech Republic does not, at first glance, differ from establishing any other commercial company. However, the strategic decision-making that precedes this process is crucial.

Choice of legal form

The most common forms for an SPV are the limited liability company (s.r.o.) and the joint-stock company (a.s.).

• Limited liability company (s.r.o.): It is preferred for its relative simplicity, lower administrative burden, and minimal share capital requirements. It is an ideal choice for simpler development projects or smaller groups of investors.

• Joint-stock company (a.s.): It is suitable for more complex projects with a larger number of investors, where a flexible change in ownership structure or even a future stock market listing (as in the case of a SPAC – Special Purpose Acquisition Company) is planned. The process of transferring shares is significantly simpler and faster than transferring a stake in an s.r.o., which is crucial during an exit or when new partners join.

The decision between an s.r.o. and an a.s. is not just a tactical choice based on establishment costs. It is a strategic decision that defines future flexibility, financing options, and the simplicity of selling the entire project. What initially seems like a saving can become more expensive in the future due to complications in transactions.

The establishment process

The establishment process itself involves several key steps:

1. Defining the purpose and objectives: The most important step. The purpose must be clearly and narrowly defined in the founding documents. This is the fundamental argument against claims that it is a fictitious company.

2. Choosing the legal structure: The aforementioned decision between an s.r.o., a.s., or another form.

3. Drafting the founding documents: Drafting the articles of association or statutes is a moment where the role of an experienced lawyer is irreplaceable.

4. Registration in the Commercial Register: Obtaining an ID number (IČO) and the formal creation of the company.

5. Opening a bank account: An absolutely crucial step for maintaining financial separation from the parent company.

There is also the option of buying a so-called "ready-made" company on the market. While this procedure is fast, it carries the risk of a hidden history and liabilities. ARROWS can conduct thorough due diligence on such a company or arrange for the establishment of a completely new, clean entity tailored to your needs.

The biggest legal trap: When can a creditor "pierce" your SPV and seize the parent company's assets?

The doctrine of "piercing the corporate veil" is no longer just a foreign theory; Czech courts are increasingly inferring the liability of parent companies if the SPV is merely a façade/sham, as confirmed by recent cases – a consultation with ARROWS will clarify what conduct is considered risky.

The principle of separate assets and limited liability is not absolute. There is a legal doctrine known as "piercing the corporate veil." This is an exceptional situation where a court disregards the legal independence of an SPV and rules that the parent company or its shareholders are directly liable for its debts with their own assets.

Although this doctrine is not explicitly codified in a single paragraph in Czech law, courts apply it through general principles, such as the prohibition of abuse of rights or the principle of good faith under the Civil Code. Courts do not assess the formal structure but the actual substance of its operation.

The Enron case, where SPVs were massively abused to hide debts, is the most famous warning of how fatal the consequences of such conduct can be. What are the warning signs that can lead to piercing the veil? Case law, both Czech and foreign, identifies several key factors:

Undercapitalization

The company is established from the outset with capital that is clearly insufficient to cover the foreseeable risks and liabilities associated with its purpose.

Commingling of assets

Accounting is not kept separate, funds in the SPV's account are used to pay the parent company's expenses and vice versa, and there are no separate sets of accounting books.

Disregard for corporate formalities

No minutes of general meetings are kept, meetings of statutory bodies are not held, and crucial decisions about the SPV are made informally within the parent company. The SPV is effectively managed as a mere department of the "parent."

Fraudulent purpose (façade/sham)

The SPV was established with the primary intention of harming creditors, avoiding an existing obligation, or committing other fraud.

ARROWS helps clients prevent these risks. The key is to establish robust internal policies and processes that demonstrably ensure the SPV operates as a truly independent entity. We prepare legal opinions that assess proposed structures and identify weak points before they can cause a problem.

Liability of an SPV's director: How to protect your personal assets?

A recent decision by the Supreme Court has redrawn the map of director liability, making it easier for third parties to sue them directly for damages.

The role of an SPV director carries significant personal liability, which is often underestimated. Every member of a statutory body is obliged to perform their function with due managerial care, which means acting loyally, with the necessary knowledge and diligence, in the best interest of the company under the Civil Code.

If a director breaches this duty and causes damage to the company (e.g., by concluding a clearly disadvantageous contract), they are liable for this damage with all their personal assets. If the company is unable to pay its debts to creditors as a result of this damage, the creditors may, under certain circumstances, claim compensation directly from the director.

A turning point came with a landmark judgment of the Supreme Court (file no. 25 Cdo 1319/2022), which ruled that a director who is de facto independent in their activities (e.g., is also the controlling shareholder) can be held directly liable for damage caused to a third party, jointly and severally with the company. For the injured party, this means they no longer have to go through the lengthy process of first suing the (often insolvent) company but can turn directly to the director.

Another critical duty is the timely filing of an insolvency petition if the company is insolvent, as defined in the  Insolvency Act.Neglecting this duty leads to the director's personal liability for the damage incurred by creditors as a result of the delay. The recent case of MAMMOTH s.r.o., where the court ordered the directors to deposit CZK 42 million into court custody as a preliminary measure, is a stark example.

ARROWS provides expert training for management, where we explain in detail the duties and responsibilities of statutory bodies. We also help set up internal approval and delegation processes that demonstrate due care, and we provide effective representation in court in cases of disputes over damages.

Tax audit at the door: Asset transfers and the arm's length principle for SPVs

The Supreme Administrative Court has clear criteria for the "arm's length price" in transactions between related parties, and if you cannot substantiate it, you risk a tax reassessment and heavy penalties. The relationship between a parent company and its SPV is a textbook example of a relationship between "related parties" from the perspective of  tax laws.

All transactions between these entities—whether it's providing a loan, selling assets, leasing, or charging service fees—must be conducted at an "arm's length price." This is the price that independent parties would agree to under the same conditions on the open market. 

If the tax authority discovers during an audit that the price was set differently (e.g., the parent company sold land to the SPV below market price to reduce its profit), it has the right to adjust the tax base and assess additional tax, including heavy penalties and late payment interest. The burden of proof to justify the price lies entirely with the taxpayer.

The Supreme Administrative Court (NSS) has long addressed this issue and has clearly defined in its case law how the arm's length price should be determined and documented. It is not enough to estimate the price; a market comparison study or an expert opinion is often required.

Another risk is the so-called hidden contribution. If an asset is transferred to an SPV at a price lower than its market value, the difference may be assessed as taxable gratuitous income (formerly gift tax) on the part of the SPV. Non-monetary contributions to a company also have specific rules for valuation and taxation that must be strictly followed.

The ARROWS team provides integrated legal and tax advisory services. We prepare legal and tax analyses for clients, help correctly set up and document transfer prices, and effectively represent them during tax audits. Our international network, ARROWS International, is then key to correctly setting up cross-border transactions and avoiding double taxation.

Key risks of using SPVs and how to prevent them with ARROWS

Make the SPV your strategic tool, not a nightmare

A Special Purpose Vehicle is an exceptionally powerful tool for growth, investment, and risk management. However, its true effectiveness and security depend entirely on the quality of its legal and tax architecture. The slightest mistake in its setup can turn a strategic advantage into a costly trap.

At ARROWS, we rely on proven experience. Our portfolio includes caring for more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions. Thanks to our international network, ARROWS International, we are able to handle complex transactions in more than 70 countries worldwide, making us the ideal partner for your global ambitions. Our market position was also confirmed by the entry of our strategic partner, ETL Global, with whom we form one of the leaders in the field.

At ARROWS, we don't just help you establish an SPV correctly. We offer long-term cooperation that includes expert training for your management, access to our client network for networking, and potential connections to investment opportunities. Contact us to find out how we can take your business to the next level – safely and effectively.

Don't want to solve this problem alone? More than 2,000 clients trust the ARROWS law firm, and we have been honored as Law Firm of the Year 2024. See our references HERE, and it will be our honor to help you solve your problem. The initial inquiry is free of charge.