Special Purpose Entities: Guide to SPEs in Finance

By Janet M. Tavakoli, President, Tavakoli Structured Finance, Inc.

Updated June 2025

What Are Special Purpose Entities and Vehicles?

Defining Special Purpose Entity and Vehicle

Special Purpose Entities (SPEs), or Special Purpose Vehicles (SPVs), are legal entities and powerful structured finance tools that have benefited banking and investment communities. They have enabled banks to manage their balance sheets more effectively while creating new asset classes for investors. However, reactions to recent financial scandals threaten to restrict legitimate and beneficial uses of SPEs without addressing the root causes of the problems.

Uses of Special Purpose Entities in Finance

Benefits of Special Purpose Entities

Special purpose entities are established for one or more of the following reasons

• Expand access to capital markets.
• Access sophisticated financial services.
• Isolate owner(s) from financial risks.
• Reduce taxes.
• Reduce regulatory capital or other requirements.
• Reduce economic capital requirements.
• Safeguard the confidentiality of transactions and the owner(s).

SPEs typically operate off-balance sheet, are bankruptcy remote, and maintain a private nature. These characteristics make them suitable for both legitimate and illegitimate purposes. Unfortunately, certain SPE structures can facilitate money laundering, misrepresent loans as revenue to inflate earnings, conceal embezzlement, and conceal losses or other accounting improprieties. We will briefly discuss examples later: Ukrainian oligarchs using SPEs to embezzle, Enron and J.P. Morgan using SPEs to disguise a loan, and the role of SPEs in the 2008 financial crisis. Even when used legitimately, the reporting of SPE issuances sometimes operates in ethically questionable ways.

Special Purpose Vehicles in Securitization

How Special Purpose Vehicles Work

Special Purpose Entity (SPE) is a global term used interchangeably with Special Purpose Vehicle (SPV). An SPE can be structured as a Trust, Company, Limited Liability Company (LLC), or Limited Partnership (LP), and may be established either domestically (onshore) or internationally (offshore).

SPEs serve various legitimate securitization and financing purposes, including:

• Structured risk management solutions
• Asset securitization
• Non-recourse financing
• Improved refinancing options
• Enhanced liquidity

In securitization, the SPE purchases assets directly or in a synthetic form and assumes the risk. These assets then serve as collateral for notes issued by the SPE.

Examples of SPEs include:

• Special Purpose Corporations (SPCs), which may function as Special Purpose Subsidiaries or captives
• Master Trusts
• Owner Trusts
• Grantor Trusts
• Real Estate Mortgage Investment Conduits (REMICs)
• Financial Asset Securitization Investment Trusts (FASITs)
• Multi-seller Conduits
• Single Seller Conduits
• Structured Investment Vehicles (SIVs)
• Certain Domestically Domiciled Corporations
• Special Purpose Acquisition Companies (SPACs)

Types of Special Purpose Entities Explained

Pass-Through vs Pay-Through SPE Structures

Special purpose entities are often classified as either pass-through or pay-through structures.

Pass-through structures pass through all of the principal and interest payments of assets directly to investors. These structures are generally passive tax vehicles and do not attract tax at the entity level.

Pay-through structures allow for reinvestment of cash flows, restructuring cash flows, and purchasing additional assets. For example, credit card receivable transactions use pay-through structures to allow reinvestment in new receivables, enabling the issuance of bonds with a longer average life.

Qualifying Special Purpose Entities vs Variable Interest Entities

The regulatory, tax, and accounting treatments of SPEs vary by jurisdiction. However, U.S. Generally Accepted Accounting Principles (GAAP) allow both Variable Interest Entities (VIEs) and Qualifying Special Purpose Entities (QSPEs) to be treated as off-balance sheet entities. Each must meet certain conditions to obtain this exemption.

Qualifying Special Purpose Entities (QSPEs):

• Are exempt from consolidation if they meet specific criteria (e.g., if a majority of the activities are limited to securitizing or hedging assets or liabilities of the parent company).
• Assets are usually administered by a trustee if the QSPE is used to securitize assets.

Variable Interest Entities (VIEs):

• Control is often arranged through contractual relationships rather than direct ownership.
• The primary beneficiary (PB) must consolidate the VIE in its reporting statements: The PB is a  variable interest holder, who absorbs a majority of its expected losses, receives a majority of its expected residual returns, or both and controls the entity.
• The primary beneficiary, the party with the most significant economic exposure, typically consolidates the VIE. However, if it meets specific criteria, the VIE may be exempt from consolidation, though this exemption is more challenging to achieve than for QSPEs.

To ensure off-balance sheet treatment, entities must work with experienced lawyers and accountants in the relevant jurisdictions.

Bankruptcy Remote Benefit of Special Purpose Entities

Financial professionals use SPEs to securitize cash assets to achieve non-recourse financing (non-recourse to the originator/seller). The SPE asset holders are bankruptcy remote, ensuring that the originator’s potential bankruptcy or insolvency does not affect investors’ rights to the vehicle’s cash flows.

Originators are primarily concerned with accounting issues, specifically whether the structure qualifies for off-balance sheet treatment and prevents asset consolidation on the originator/seller’s balance sheet. For bankruptcy and accounting purposes, originators seek a “true sale at law” opinion. This sale is also known as a conveyance.

The structure should simultaneously function as debt financing for tax purposes, also called a “debt-for-tax” structure. Tax treatment operates independently from accounting and bankruptcy treatment. An originator selling assets to a Special Purpose Entity (SPE) typically wants to ensure the asset sale does not create a taxable event. The securitization should be treated as a financing for tax purposes—effectively treated as the originator’s debt with an accompanying tax opinion.

True Sale in Special Purpose Vehicle Deals

The structured solution to bankruptcy, true sale, and debt-for-tax issues varies by jurisdiction. For example, when a U.S. bank securitizes receivables, the structure requires two SPEs to avoid a federally taxable asset sale while achieving off-balance-sheet financing and a bankruptcy-remote structure. In the U.S., SPEs are typically organized as trusts (for tax reasons) under Delaware or New York state laws.

The first SPE functions as a wholly owned, bankruptcy-remote subsidiary of the originator/seller and purchases the assets in a true sale. This structure puts the assets beyond the reach of the originator/seller’s creditors and the originator/seller itself. Wholly owned subsidiaries are consolidated with the originator/seller for U.S. federal tax purposes, thus achieving the debt-for-tax objective.

The second SPE issues the debt (or Asset-Backed Securities) and operates independently from the originator/seller as a bankruptcy-remote entity. This second SPE purchases the assets from the first SPE in a transaction that qualifies as a true sale for accounting purposes while remaining a financing for tax purposes.

Repackaging Assets Through Multi-Issuance Entities and SPEs

Repackaging is another legitimate use of SPEs. U.S. banks often set up multi-issuance entities (MIEs) in a tax-friendly venue. MIEs are classified as Qualifying Special Purpose Entities (QSPEs): off-balance sheet, bankruptcy-remote entities. A true sale presumptively places the assets beyond the reach of the bank transferor’s creditors. Additionally, the bank has no obligation to repurchase the transferred assets.

This SPE structure insulates customers from the bank’s credit risk and ensures the assets do not reappear on the bank’s balance sheet, even though the SPE may frequently purchase assets from the bank sponsor’s books.

Accounting rules are subject to change. The Financial Accounting Standards Board (FASB) continuously reviews conditions imposed on active SPE assets through equity ownership, management agreements, or other mechanisms. FASB holds regular meetings regarding SPEs, sale criteria, transfers of financial instruments, and modifications to the QSPE definition.

The MIE issues notes referencing only the underlying collateral specific to each note. Noteholders have no claim to any other assets owned by the SPE. Each asset set is funded separately with its own Euro Medium-Term Note (EMTN) tranche, combining the risk characteristics of the underlying assets and/or derivatives. These derivatives may function as hedges or constitute an underlying asset, such as a credit derivative.

The SPE purchases assets pre-funded from proceeds of an EMTN issued by the SPE and underwritten or sold by the bank arranger’s (bank sponsor’s) capital markets group. The SPE transfers the asset cash flows to the bank arranger’s swap desk as one leg of a swap payment. The bank arranger pays the other leg of the interest rate swap: the structured coupons paid to the EMTN investors. The diagram shows cash flow for a Cayman-domiciled SPE. As discussed later, the venue depends on current tax, accounting, and regulatory considerations.

A diverse investor group purchases EMTNs issued by an MIV, including insurance company funds, independent funds, bank-sponsored funds, corporations, banks, and U.S. investors eligible to purchase 144A assets.

From the investor’s perspective, the EMTN is secured by collateral purchased by the SPE and frequently, but not always, selected by the investor. From the bank’s perspective, EMTN’s off-balance sheet assets are “ringfenced” and secure the payments on the interest rate swap used to structure the EMTN’s coupons.

Synthetic Securitizations: How Banks Leveraged SPEs

Synthetic securities transfer risk using credit derivatives, total return swaps, options, or other derivatives. Since no asset has been sold, synthetic securities do not get true sale treatment for accounting purposes.

The motive behind these structures is to reduce regulatory capital according to regulatory accounting principles. Funding is a non-consideration or a minor consideration. These are usually balance sheet deals for bank regulatory capital relief. Partial funding is feasible with a hybrid structure where the SPE is an issuer of credit-linked notes. A corollary motive is to get credit risk relief.

Global Tax Rules for Special Purpose Entities

Where is the best place to set up an SPE? The optimal location depends on the structured finance application and various other considerations. At the beginning of the 21st Century, SPEs were established in multiple tax-friendly venues, including Delaware (United States), New York, Luxembourg, the Netherlands, the Cayman Islands, Ireland, Jersey, Guernsey, and Gibraltar. However, regulations constantly evolve.

In 2025, the OECD’s global minimum tax agreement (Pillar Two), the Global Anti-Base Erosion (GloBE) Rules, impose a 15% minimum corporate tax rate for multinational enterprises (MNEs) with consolidated revenues exceeding EUR 750 million. The minimum tax reduces the tax avoidance benefits of offshore SPEs, prompting companies to reassess venues like Ireland, which offers tax treaty advantages and faster setup times.

While SPEs in the United States are often (though not always) established as trusts for tax reasons, non-U.S. venues typically use the special purpose corporation structure.

Tax treatment is key, but not the only consideration when choosing a venue. For example, many German investors require an OECD issuer. Therefore, the SPE must be established in an OECD country. The Netherlands, Luxembourg, and Ireland are currently the most commonly used tax-friendly venues among OECD countries.

From a tax perspective, the goal is for the SPE to pay zero tax on incoming and outgoing payments. The structure should not attract corporate income tax at the SPE venue and the bank sponsor location. There are two withholding tax issues to consider:

1. Withholding tax at the source (the SPE’s incorporation venue) on EMTNs issued by the SPEs, and
2. Withholding tax imposed on underlying assets purchased by the SPEs by the country where the assets originated.

The objective is that neither interest nor dividends the SPEs pay are subject to withholding tax.

When choosing a venue like the Cayman Islands, which lacks tax treaties with most jurisdictions, there is no mechanism for reclaiming tax withheld (if any) on the underlying asset income from the country of origination. The SPE will purchase assets not subject to withholding in the country of origin to prevent investors from suffering reduced returns.

Alternatively, choosing a venue with established tax treaties allows structurers to choose assets that incur withholding tax, and the SPE can reclaim the tax, a legitimate use of an SPE. Tax evasion is illegal; tax avoidance is legal.

The goal is to avoid tax on the SPE’s income. Avoiding value-added tax (VAT) and stamp duties is important in Europe. The ideal outcome is zero tax leakage. Venues such as the Cayman Islands, Jersey, and Guernsey offer this advantage but may not enjoy broad investor acceptance.

Other venues such as the Netherlands, Luxembourg, and Ireland also offer several tax advantages:

• No withholding tax on note interest
• No stamp duty
• Minimal value-added tax (VAT) on servicing and administration for the SPE
• No withholding tax on deposits

Among these three venues, other factors may influence the final choice. The Netherlands typically takes several weeks longer to provide tax rulings for SPEs than Ireland and Luxembourg. For expedited setup, Ireland or Luxembourg might be preferable. In Ireland, the SPE must comply with the Irish tax securitization code, which may slightly increase costs relative to Luxembourg. UK-based deal arrangers might find it more convenient to work with Ireland, which uses an English law-based system. Recently, Ireland has been the fastest of the three venues in actual setup time, usually two to three weeks once documentation is complete.

Local experts should verify regulations regarding local equivalents of the U.S. Bankruptcy Court’s automatic stay procedures, accounting rules, and tax laws.

Risks and Misuse of Special Purpose Vehicles

Many SPEs are part of international shadow banking: poorly regulated financing vehicles and non-securitization vehicles. Moreover, one can make webs of special purpose entities to obscure who controls and owns the entities to engage in money laundering, embezzlement, fraud, and other chicanery. over time via the same set of special purpose vehicles.

Fraud Using Special Purpose Vehicle Deals

The United States, the European Union, and Great Britain have funneled an estimated $174 billion to Ukraine since the Russian invasion in February 2022 through December 2024. The USA alone allocated over $182 billion and disbursed over $83 billion in funds and equipment. Leaders of all countries involved have demonstrated a lack of prudence and honesty by not enforcing the highest accountability standards.

The lack of controls is particularly egregious given the recent and ongoing financial scandals in Ukraine, including the Biden family’s financial transactions that appear to be blatant influence peddling, which is not included in the following three examples:

• PrivatBank scandal (2008-2016): Former owners allegedly embezzled billions via an SPE network primarily registered in Cyprus with accounts at Private Bank’s Cyprus branch. The U.S. Department of Justice filed civil forfeiture complaints in 2020, alleging that these SPEs had obfuscated misappropriation and that perpetrators had used the tainted funds to buy property in the United States.
• Embezzlement (2010-2014): Allegedly, oligarchs set up SPEs in tax havens such as Jersey and the British Virgin Islands to embezzle $70 billion, using the money to buy assets outside Ukraine. Due to the opacity of SPE ownership, investigators have only frozen $1-2 billion in assets. Recovery will be slow, and full recovery may never be attained.
• Wartime Exploitation (February 2022 to December 2024): The U.S. Government Accountability Office (GAO) noted that the State Department lacks a systematic tracking system for economic and humanitarian assistance. This exacerbates the risk that SPEs could be used to divert aid to offshore accounts. In less than three years, Congress poured over $80 billion into a classic fraud situation, and the U.S. cannot trace the money. A fraud audit is a prudent next step.

Enron & J.P. Morgan: Two SPEs Disguised a Loan

Enron and J.P. Morgan infamously used J.P. Morgan’s special purpose corporations to disguise a loan as shown in the diagram. A circular deal involving JPMorgan Chase, Enron, and the special purpose entities Mahonia and Stoneville was part of a series of transactions known as “prepays,” used to disguise loans as commodity trades, allowing Enron to misrepresent its financial health. These deals contributed to Enron’s collapse in 2001, the collapse of accounting firm Arthur Anderson, and legal, reputation, and financial consequences for JPMorgan Chase.

Many who read the documents were confused about how the cash flows worked due to the obfuscation of the sham commodities transactions. The simplified generic diagram below makes it easy to follow the cash flows.

The SEC complaint highlighted that Mahonia, controlled by JPMorgan Chase, was used to structure transactions that eliminated commodity price risk, making them loans in substance. These transactions allowed Enron to hide debt as “price risk management liabilities” on its balance sheet, misleading investors and rating agencies. (Securities and Exchange Commission, “SEC Settles Enforcement Proceedings against J.P. Morgan Chase and Citigroup” (July 28, 2003). For more details, see: “Enron, J.P. Morgan, and Offshore Special Purpose Vehicles.”

SPEs in the 2008 Global Financial Crisis

Special purpose entities (SPEs) played a role in the global financial crisis as building blocks of residential mortgage-backed securities (RMBS) and synthetic collateralized debt obligations (CDOs). With the use of credit derivatives, sometimes the same rotten risk was transferred into SPEs and passed on to unwary investors repeatedly. This way, SPEs amplified risk, leading to the 2008 financial crisis.

New Rules for Special Purpose Entities

The U.S. Congress heard excuses from corporate officers: “I am responsible, but I am not guilty. I am guilty, but I am not responsible. I am not responsible, and I am not guilty.” Financial executives would have you believe that permanent value destruction resulted from spontaneous combustion.

President George W. Bush signed into law the Sarbanes-Oxley Act of 2002. The Act requires that 10-K and 10-Q reports disclose off-balance sheet transactions, contingent obligations, and relationships with unconsolidated entities. Corporations are obliged to report swaps, other derivatives, contingent liabilities, and the activity of offshore SPEs so that potential hidden risks are fully disclosed. In other words, the financial reports should tell the entire story accurately.

The Act created new criminal penalties for destroying evidence and certain types of security fraud. There are also criminal penalties if CEOs and CFOs fail to perform the certifications the Act requires. The Act also calls for a criminal penalty if the company retaliates against a whistleblower. However, laws only matter when they are enforced. The Act is another example of Congressional kabuki.

The SEC can invoke only civil penalties; the Department of Justice can pursue criminal prosecution and levy criminal penalties. However, no high-profile Bank CEO or CFO was prosecuted and jailed after the 2008 Global Financial Crisis for lying on financial statements before the meltdown.

The 2008 Global Financial Crisis, JPMorgan’s London Whale scandal, MF Global’s bankruptcy, and others demonstrated that a lack of deterrence leads to further abuse.

Sarbanes-Oxley Act Enhancements

In 2025, the Securities and Exchange Commission (SEC) strengthened enforcement of Sarbanes-Oxley provisions, particularly around off-balance-sheet disclosures. Companies must now provide detailed reporting of SPE activities, swaps, and contingent liabilities in 10-K and 10-Q filings.

The SEC took another slow-walking step in the right direction. However, the penalties for flouting the rules remain weak. Banks and other financial institutions pay hand-slap fines after CEOs and CFOs reap years of salaries and bonuses. Civil penalties remain common, and criminal prosecutions are rare for SPE-related misconduct.

International Regulations

In March 2022, the IMF announced the launch of an international database on Special Purpose entities (SPEs). In 2025, national compilers are encouraged to document legal provisions for SPEs using the IMF guidelines: “Special Purpose Entities: Guidelines for a Data Template” the guidelines help compilers identify resident SPEs. The IMF proposes to “operationalize the agreed definition of Special Purpose Entities (SPEs) with a view to separately identifying their cross-border flows and positions.”

Weaknesses in the IMF Special Purpose Entity Database

The IMF collects information from participating countries on foreign (offshore) SPEs controlled by the country’s residents for its database. A country may also collect data on SPEs domiciled in that same country.

It is unlikely that the IMF’s database will enable investigators to untangle an SPE web with foreign SPEs that are domestically controlled and domestic SPEs that are domestically controlled. If several countries are involved in the former type of web, the odds of untangling the web plummet.

Employee Loophole

If owner(s) want to avoid having an entity classified as an SPE for ESS purposes, they could hire six inexpensive clerks in the host country because the IMF’s definition of an SPE requires five employees.

European Union Anti-Money Laundering (AML) Reg 2024/1624)

In 2024, partly in reaction to the Ukrainian abuses mentioned previously, the European Union instituted new regulations to create transparency about beneficial ownership of special purpose entities. The EU aims to reduce tax evasion, money laundering, and the financing of terrorism. This directive may be more effective than previous directives.

SPE Abuse Sparked Stricter Accounting: ASC 810 and IFRS 10

Reaction to the infamous Enron financial scandal inspired stricter accounting standards for SPEs. A noticeable change was the recognition of certain upfront derivative contract payments as financing instead of revenue.

In 2025, the Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) continue to enforce stricter consolidation requirements under ASC 810 (US GAAP) and IFRS 10. Global standards often use U.S. standards as a benchmark. When global standards do not converge, gamers look for regulatory arbitrage and create structured financial products to exploit the differences.

Stricter standards mandate that SPEs, especially variable interest entities (VIEs), be consolidated if the parent company is the primary beneficiary, even without majority voting control. The purpose is to create transparency and prevent off-balance-sheet obfuscation of liabilities.

Collateralized debt obligations (CDOs) must comply with stricter standards. Since 2019, synthetic CDOs have made a comeback. Before the 2008 Global Financial Crisis, newly created CDOs covertly transferred previously created failed CDO tranches to unwary investors. The new rules may affect so-called beneficial structures. Reserve accounts built up from residual cash flows in synthetic deals may cause the CDO to be treated as a variable interest entity (VIE).

FASB conducts ongoing reviews of QSPE definitions, potentially impacting collateralized debt obligations.

SEC Rules on SPACs: Growing Use in Public Markets

Special Purpose Acquisition Companies (SPAC) are publicly traded companies. These SPEs are formed to acquire or merge with a private company to take it public. Instead of launching an Initial Public Offering (IPO), a private company can merge with the SPAC and become publicly traded.

The SEC’s 2024 final Special Purpose Acquisition Company rules became effective in January 2025. The SEC aims to enhance investor protections by requiring disclosures on sponsor compensation, conflicts of interest, and dilution in SPAC IPOs and de-SPAC transactions.

New Applications for Special Purpose Entities

SPEs are used more frequently in sustainability projects like renewable energy and global expansion. However, it’s possible that some of these projects are money laundering schemes or favored transactions for politically connected people. These may be high corruption-to-production ratio projects of the ilk that the Trump Administration’s DOGE effort seeks to curtail.

Blockchain technology has not yet been effectively used to create transparency and a means to trace money flows. However, regulators may make traceability mandatory if taxpayers push for accountability, prosecutions, and reform.

Conclusion

Each time a new scandal erupts, regulators write a blizzard of white papers and issue new regulations. Enhanced disclosure requirements under Sarbanes-Oxley, Dodd-Frank reforms, stricter accounting standards, the IMF’s new database initiative, tax reform, and the EU’s new anti-money laundering initiative are all good ideas on paper. However, if history is a guide, SPE abuse will continue without adequate means of following international cash flows and meaningful prosecutions of bad actors.

Structured finance professionals must consider changing compliance rules across multiple jurisdictions. Those who obey the law have more laws to obey. Those who flout the law merely have a new law to skirt. Meanwhile, the fundamental value of SPEs for bankruptcy remoteness, efficient capital allocation, and liquidity enhancement continues to make them essential components of the global financial system.

The history of SPEs teaches us that financial innovation is inevitable, but so should be the development of effective deterrents to financial chicanery.

For an in depth look at special purpose entities, read Structured Finance and Collaterlaized Debt Obligations, Second Edition (Wiley, 2008) and Credit Derivatives and Securitization, Third Edition (2023) by Janet Tavakoli, President of Tavakoli Structured Finance.

About the Author

Janet Tavakoli is the president of Tavakoli Structured Finance founded in 2003. She is a globally recognized structured finance expert and derivatives authority who has advised financial regulators, testified as an expert witness in major financial litigation, and authored definitive works on credit derivatives and securitization.

This is a fully updated and revised version of the presentation given by Ms. Tavakoli to the Federal Reserve Conference on Bank Structure and Supervision in 2003 and published in its conference book titled “Uses and Abuses of Special Purpose Entities.”

For comprehensive analysis of structured finance products and securitization strategies, consult Tavakoli Structured Finance.

Sources and References

IMF Special Purpose Entities Database (2022)

International Monetary Fund, “IMF Announces the Release of a New Database on Special Purpose Entities (SPEs),” press release, March 2, 2022,

Sanchez-Munoz, C., Harutyunyan, A., & Hurree Gobin, P. S. (2022). Special Purpose Entities: Guidelines for a data template (Technical Notes and Manuals No. 2022/006). International Monetary Fund.

European Parliament and Council of the European Union, “Regulation (EU) 2024/1624 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing,” Official Journal of the European Union L 1624 (May 31, 2024). Regulation (EU) 2024/1624, 2024 O.J. (L 1624) (EU).

OECD Pillar Two (GloBE Rules)

Organisation for Economic Co-operation and Development, Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) (Paris: OECD Publishing, 2021).

Books

Tavakoli, Janet. Structured Finance and Collateralized Debt Obligations. New Jersey: Wiley, 2008.

Tavakoli, Janet. Credit Derivatives and Securitization, 3rd Edition. Chicago: Lyons McNamara, 2022. An update of the first two editions published by John Wiley & Sons with a detailed explanation of how credit derivatives amplified risk during the financial crisis and how they can be legitimately used for protection and profit today.

Related Articles

Collateralized Debt Obligations

Enron, J.P. Morgan, and Offshore Special Purpose Vehicles

Credit Derivatives and Credit Default Swaps

Synthetic Collateralized Debt Obligations: Risk, Valuation, and Market Practices

Credit Rating Agencies: How Moody’s, S&P and Fitch Failed