abhishreshthaa
Abhijeet S
TAX TREATMENT OF THE SPECIAL PURPOSE VEHICLE:
Taxation of the SPV is one of the most crucial tax issues in a securitization transaction. The ultimate cost of a securitization transaction would be increased if the SPV taxation leads to a double taxation of originator income.
Therefore following are the three alternative ways of taxing the SPV
1. Pass-through or tax spread entity:
The SPV is not treated as taxable entity; investors are taxed in individual capacity on their share of income
2. Representative taxation:
SPV is taxed as representing investors. SPV pays tax usually at a maximum marginal rate; investors do not pay tax on their share in the income.
3. Entity level tax:
SPV pays tax on its income net of investor servicing. Investors pay tax on income received by them. Originator’s share is taxed twice.
Out of the above three alternatives, the alternative one is more suitable as under this, SPV will be regarded as a tax neutral entity.
Taxation of the SPV is one of the most crucial tax issues in a securitization transaction. The ultimate cost of a securitization transaction would be increased if the SPV taxation leads to a double taxation of originator income.
Therefore following are the three alternative ways of taxing the SPV
1. Pass-through or tax spread entity:
The SPV is not treated as taxable entity; investors are taxed in individual capacity on their share of income
2. Representative taxation:
SPV is taxed as representing investors. SPV pays tax usually at a maximum marginal rate; investors do not pay tax on their share in the income.
3. Entity level tax:
SPV pays tax on its income net of investor servicing. Investors pay tax on income received by them. Originator’s share is taxed twice.
Out of the above three alternatives, the alternative one is more suitable as under this, SPV will be regarded as a tax neutral entity.