Ringfencing or ring-fencing refers to when a portion of a company’s profits or assets are financially separated but do not take on the form of a separate entity. There are many reasons this can take place, but some of the most common include:
Asset protection;
Regulatory reasons; and
The pursuit of separating income streams for tax purposes.
Ring-fencing can be used as an asset protection arrangement to mitigate the risk of liquidation. Separating income streams for taxation purposes often relates to the higher corporation taxes placed on certain products. This is especially relevant to activities such as petroleum extraction.
Regulatory separation is slightly more complicated and allows an investor to possess a link to a specific asset while maintaining full credit support. This is especially popular in instances where a regulated public entity may separate itself from a parent company that partakes in non-regulated business. This protects the interest of both the company and the consumer while remaining within legal guidelines.
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