Understanding the relevance of special purpose entities across the euro area
30 April 2024
By Fausto Pastoris
The ECB has released new data that provide insights into the relevance of special purpose entities (SPEs) in the euro area and euro area countries. The data can be easily compared across countries, because there is an internationally agreed definition of SPEs and the information is collected in a harmonised way.
SPEs are legal entities set up in a country in which they do almost no business, as they have minimal to no employment, physical presence or production capacity in that location. Multinational enterprises often create SPEs to benefit from advantages specific to the host country, such as lower tax burdens or easier access to capital markets.
Although they have little to no impact on the host economy, SPEs can considerably inflate the value of its external financial assets and liabilities. By tracking external transactions and positions of SPEs, we can better understand how countries are interconnected and learn more about the associated determinants, risks and dynamics.
By the end of 2023, SPEs accounted for around 11% of euro area external assets and liabilities, varying in importance across individual euro area countries (Chart 1).
In Malta and Cyprus SPEs account for most external assets and liabilities. SPEs also play a significant role in Luxembourg and the Netherlands, where they account for around 20% of the countries’ external assets and liabilities, while this figure stands at almost 10% in Ireland. In the other euro area countries, SPEs are hardly relevant.
As SPEs are often set up by multinational companies, they have a significant impact on FDI data. FDI data mostly reflect multinational cross-border financial linkages, such as equity investment in foreign subsidiaries or intragroup loans.
By the end of 2023, SPEs accounted for almost one-third of both euro area FDI assets and liabilities (Chart 2). SPEs were responsible for almost 60% of FDI assets and liabilities in Luxembourg and almost 30% in the Netherlands. In Ireland, SPEs do not play a big role in FDI. This is because many foreign multinationals regularly set up entities in the country in a way that does not match the SPE definition, since they have some presence in the host economy in terms of employment and production.
Over the past four years, there has been a decrease in the value of external assets and liabilities held by SPEs at the euro area level.
This was primarily driven by FDI, with several quarters showing significant decreases in both FDI assets and liabilities held by SPEs (Chart 3). Negative transactions in FDI can be linked, for example, to foreign investors withdrawing equity or repaying loans. This may indicate that multinationals are making some changes to how they operate globally – for instance, foreign investors reducing their use of SPEs in euro area countries.
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The views expressed in each article are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.