Where to set up a Holding Company
In the previous letter, we were discussing some of the major benefits of using a holding company and how it can be used for asset protection, risk management, tax planning, and operational efficiency purposes.
We also reviewed certain key aspects that one should consider when structuring a holding and choosing the jurisdiction to establish it such as the type of legal structures available, the underlying holdings and economic activities, taxation and tax treaties between jurisdictions as well as the needs and availability of financial services
We also highlighted the importance of economic substance and how a holding structure that lacks ‘mind and management’ within the jurisdiction of incorporation may be considered non-resident or may be seen as an arrangement only put in place to create a tax advantage and be classed as disregarded for tax purposes.
If you haven’t had the chance to read our previous article, you can do it here.
In today’s article, we’ll go over some jurisdictions which might be interesting for holding purposes.
Note that there is no such thing as ‘one-size-fits-all’ when it comes to incorporating a holding company. The most suitable jurisdiction will largely depend on the many variables related to your specific underlying business activities or assets, the location of these assets, the jurisdiction of tax residency of the owners and the overall goals and purposes of the holding, among many others.
For instance, a jurisdiction suitable for a holding used to raise funds and provide financing to underlying subsidiaries might not be the same as the one for holding and exploiting intellectual property rights. It can depend on whether your holding owns equity in tax-neutral subsidiaries or in high-tax locations, the existence of double tax treaties between jurisdictions, whether the main source of income would be dividends or capital gains, commercial and/or financial interests, etc.
These are just some variables that one should take into account where to incorporate their holding and a personalized approach should always be taken. For the current article, we will review specific jurisdictions that have certain attributes which make them interesting options for holding companies.
The following does not intend to provide a comprehensive review of all the potential jurisdictions suitable for holding purposes or provide a detailed report of each jurisdiction covered.
Nothing in this article constitutes legal or tax advice of any kind and is provided “as-is” for informational purposes only, without any warranty or guarantee for fitness. These laws change frequently and professional advice is absolutely necessary.
Singapore is a jurisdiction included regularly in our articles, and for good reason. It is an extremely efficient and economically and politically stable jurisdiction with strong rule of law and a fair and reasonable tax regime, a responsive, well-educated financial regulator and a government that supports the free market, a vibrant fundraising landscape, as well as it has access to some of the most advanced and high-quality banking and financial services. All of these factors make Singapore suitable for a variety of business purposes.
Singapore may also be suitable for holding structures. In fact, a significant number of business groups operating within Asia-Pacific, and especially within ASEAN, choose Singapore as their holding headquarters. This is particularly common when they are trying to attract venture capital. Often startups in Thailand or Indonesia opt for a Pte. Ltd. Holding Company.
Singapore operates a full imputation tax system – corporate profits are only taxed once in Singapore. Consequently, dividends received from Singaporean subsidiaries are not taxed at the holding level and there are no withholding taxes when distributing dividends either to residents or non-residents. There are no withholding taxes on interests either but royalties and certain technical service fees paid to foreign corporations may be subject to a 10% and 17% tax, respectively, if no exemption applies and the tax rate is not reduced under a tax treaty.
Dividends received from foreign entities may be exempted from corporate tax provided that the ‘subject to tax’ and the ‘foreign headline tax rate’ conditions are met – underlying profits were subject to tax and the highest tax rate of the subsidiary’s country of domicile is at least 15%.
This means that dividends from tax-neutral or low-tax jurisdictions may be subject to tax when distributed to the Singapore parent company. However, there are no controlled foreign company rules – undistributed income of foreign subsidiaries may not be subject to tax.
Holding companies won’t generally pay tax on capital gains and there is no transfer tax on the sale of shares. However, if capital gains constitute the main source of income and activity of the company and the holding period of the sold asset is relatively short, they may be treated as ordinary income and subject to income tax. Note that as capital gains are not taxed, capital losses are generally non-tax deductible. Interest income received is subject to tax at standard rates.
For IP holdings, there are several schemes that provide significant tax benefits. The IP Development Incentive (IDI) scheme provides for concessionary tax rates of 5% or 10% to qualifying royalty and other IP income until 2023 provided that there has been a certain level of expenditure, jobs created and other economic commitments within Singapore.
There are also available deductions under the Productivity and Innovation Credit (PIC) for expenditures related to certain IP acquisitions. PIC credits can also be used for things such as software purchases which can increase your company’s productivity.
Singapore has also concluded agreements to avoid double taxation with over 80 countries. This means that dividends, interests, and royalties paid from subsidiaries of these treaty countries and received by Singapore resident entities may be subject to reduced or exempt from withholding tax rates.
To benefit from the advantageous tax regime and tax treaties a given Singapore company would need to be considered a tax resident in Singapore. Singapore Tax Residency is generally assessed by the ‘control and management’ test – the location where strategic decisions are made and control and management is exercised. Usually, the most determining factor is where the Board meetings are held, but for foreign-owned investment holding companies that might not be enough, as we’ll see below.
Foreign-owned holding companies are generally regarded as non-residents. To be considered a tax resident, the company will need to apply to the IRAS and obtain a Certificate of Residence (COR), which may need to be submitted to the relevant foreign tax authorities to claim tax treaty benefits. Note that a foreign jurisdiction can still deny access to tax reliefs even if a COR is submitted.
To obtain a COR, the IRAS will look at whether the control and management is exercised in Singapore such as via Board meetings and that there are valid reasons for setting up an office in Singapore.
Whether the company receives administrative services from a Singaporean company, has related entities doing business from Singapore or has an executive director (not a nominee) and a C-level employee based in Singapore are also important facts in order to obtain a COR.
With respect to intra-group transactions, including financing, these should be done according to the arm’s length principle – prices of transactions between related parties should be equivalent to prices that unrelated parties would have charged in similar circumstances.
Companies with gross revenue over SGD 10 million may need to submit transfer pricing documentation on transactions with related parties exceeding certain thresholds upon IRAS request.
Singaporean Ultimate Parent Entities (UPE) of large multi-national enterprises with consolidated group revenue of SGD 1.125 billion also need to file a Country-by-Country report which includes key information about revenue, tax paid and accrued, employment, capital, retained earnings, tangible assets, and business activities, among others, of the parent company and subsidiaries.
Hong Kong is the largest business and financial hub in Asia. Like Singapore, Hong Kong is characterized by a competitive tax regime, robust public finances and a vast offer of financial services.
Hong Kong is another option to consider for those looking to establish a holding in Asia.
There are generally no taxes on dividends in Hong Kong, whether received from local companies or from foreign companies. There are no withholding taxes on dividends paid to resident or non-resident shareholders, capital gains are generally not subject to tax and there is no transfer tax on the sale of shares either.
As Hong Kong applies a territorial-based tax system, there are no controlled foreign company provisions either, meaning that undistributed income from subsidiaries is not attributable to the Hong Kong parent entity.
Royalties accrued from the exploitation of certain IP rights are subject to tax in Hong Kong. Generally, 30% of royalties received are deemed to constitute profits subject to tax. However, this rule may not apply in the case of intra-group transactions, where 100% of royalties received may be subject to tax.
With regard to intra-group financing transactions – interest income derived from an intra-group loan by a Hong Kong company is subject to tax in Hong Kong at standard rates (8.25% or 16.5%).
Hong Kong has concluded DTAs with over 50 jurisdictions – the most being with Canada, Western Europe countries and large Southeast Asian economies. This means that child companies from these jurisdictions may enjoy tax benefits such as reduced withholding tax rates or exemptions when paying dividends, royalties and interests to the parent Hong Kong company.
Although for Hong Kong corporate tax purposes, corporate tax residency plays a less relevant role. If the company conducts a trade, profession, or business in Hong Kong and if the profits are arising in or derived from Hong Kong – to access tax treaties benefits, Hong Kong companies may need to prove that they are managed and controlled from and have sufficient economic substance within Hong Kong and obtain a Certificate of Residence Status from the IRD.
Like in Singapore, obtaining a Certificate of Residence Status for companies only deriving passive income may prove more difficult. The IRD may look at whether there is any board member resident in Hong Kong, the location of and the decisions made in the board meetings, whether there are any employees in Hong Kong and if the company has a physical office and bank account in Hong Kong.
Each application is handled on a case-by-case basis and there is no specific list of fixed requirements to fulfill.
As we discussed in a recent article, on July 4, 2018, Hong Kong passed The Inland Revenue (Amendment) (No. 6) Ordinance 2018 (IRO), which codifies transfer pricing rules (Fundamental Rule) and requires transactions between affiliates to be carried out at an arm’s length basis and providing certain transfer pricing documentation (TPD).
Hong Kong companies transacting with affiliates are required to prepare a TPD master file (high-level information of the group’s global business) and a TPD local file (specific TPD on intra-group transactions). HK companies that meet certain conditions, such as total revenue of not more than HKD 400 mil or total assets of not more than HKD 300 mil, among others, might be exempted from preparing the local file and master file documentation.
HK ultimate parent entities (UPE) of Multinational Enterprises with consolidated group revenue of HKD 6.8 Bil or more need to prepare and file country-by-country reports (CbCR).
The Netherlands is one of the jurisdictions that have concluded more tax treaties with other jurisdictions worldwide. This made the Dutch BV a common structure as an ‘intermediate’ holding company to access Dutch tax treaty benefits and thus reduce the consolidated tax burden of a given group structure.
As we discussed in previous articles, stringent economic substance requirements and new legislative provisions are being put in place to avoid ‘treaty shopping’ and artificial structures to create tax advantages, such as the General anti-abuse rule (GAAR) and other anti-abuse and anti-avoidance provisions. Having a shell ‘intermediate holding’ may not work anymore.
However, the Netherlands is still an interesting jurisdiction from an international structuring standpoint, as it has double taxation agreements with virtually every country in the world.
This means that dividends received by and paid to, and royalties and interest paid by Dutch holdings enjoy advantageous tax reliefs at the source with regard to withholding taxes – including the EU parent-subsidiary directives, whereby it exempts from withholding tax dividend payments to companies owning at least 20% of an EU subsidiary, subject to certain conditions such as economic substance.
The Netherlands does not levy withholding taxes on royalties and interest and the dividends withholding tax is set to be abolished next year. However, the country has announced that it will introduce a ‘conditional withholding tax’ (23.9%) on intra-group transactions, including dividends, to certain low-tax jurisdictions and artificial structures (intermediate holding owned by a UPE in a low tax jurisdiction).
A participation exemption is available whereby dividends received and capital gains may be exempt from corporate tax (currently 19% for taxable profits up to EUR 200,000 and 24.3% for the rest, 17.5% and 23.9% in 2020, and 16% and 22.5% in 2021) if the Dutch company holds at least 5% of the shares, the participation is not held as a portfolio investment and the subsidiary is subject to at least a 9% tax rate, among other conditions. Capital losses are generally non-tax deductible.
The 5% holding requirement may be waived if the subsidiary is in the same industry as other holdings and it is not held as a portfolio investment.
The Netherlands has implemented controlled foreign company rules – certain non-distributed income of a CFC, namely dividends, interest, royalties, certain capital gains, and other income will be subject to Dutch corporate tax.
CFC rules apply to foreign subsidiaries located in certain low-tax jurisdictions in which a Dutch company has a 50% or more interest. Certain exceptions will apply if a subsidiary’s passive income is less than 30% of its total income or if the subsidiary meets certain economic substance requirements in its jurisdiction of domicile.
To benefit from the large treaty network or from the aforementioned participation exemptions, companies need to have their corporate residency in Netherlands and may need to obtain a Tax Residency Certificate to claim treaty benefits.
To assess corporate tax residency Dutch authorities will consider the place where the important business decisions are made, the place where the directors work and meet and the place where the business records are kept and the financial statements are prepared.
However, both Dutch holdings and Dutch intra-group financing and licensing companies are required to meet enhanced tax substance requirements.
These entities must have at least 50% of the board to be residents and meet in the Netherlands, board members to have adequate qualifications to be directors, qualified personnel, accounts to be located in Netherlands, incur employment costs of at least EUR 100,000 (adjusted to the consumer price index) and have a local office to carry out holding functions, among other conditions.
The above requirements also apply for foreign ‘intermediate’ holdings to access to Dutch treaties benefits. In addition, holding companies may be required to finance the purchase of their holdings with at least 15% equity.
Note that an exit tax (capital gains tax) is applied to the intra-group transfer of assets from a Dutch company to other jurisdiction or to a company that transfers its tax residency from Netherlands to outside Netherlands.
Netherlands has also comprehensive transfer pricing regulations. Transactions between related entities, including loans, must be conducted following the OECD’s arm’s length principle. Local and Master file must be submitted for groups with consolidated revenue of over EUR 50 million. Large Multinational Enterprises with annual revenue of over EUR 750 million must file Country-by-Country Reports (CbCR) yearly.
Cyprus is also one of the most common jurisdictions in the EU for the establishment of a Holding Company.
Generally, dividends received by holdings either from resident or non-resident companies are exempt from corporate tax (12.5%). However, dividends from foreign companies must not be deductible for tax purposes at the source to enjoy the Cypriot tax exemption.
Cyprus also levies the so-called Special Defence Contribution (SDC) which taxes at 17% non-exempt dividend income, interest income, and rental income. Dividends received from local entities are usually exempt from SDC.
Foreign-source dividends may be also exempt from SDC provided that no more of 50% of the paying company income is derived from investment activities and the paying company is subject to a tax rate of at least 6.25%. A unilateral tax credit against SDC is usually available for foreign tax paid.
Capital gains derived from disposals of securities are exempt from taxation, making Cyprus limited companies a vehicle to consider for those looking at setting up an investment holding company. There is no transfer tax applied to the sale of shares either.
Capital gains derived from Cyprus immovable property or from companies that directly or indirectly hold Cyprus immovable property (50% of the shares’ market value derives from Cyprus immovable property) and is not listed in the stock exchange are taxed at 20%.
There are no withholding taxes in Cyprus, meaning that dividends distributed from a Cyprus company to foreign shareholders, as well as royalties and interests paid, are not subject to tax. Note that there is an exception on royalties for rights used within Cyprus, which may be subject to 10% withholding tax.
Furthermore, Cyprus has concluded tax treaties with over 50 jurisdictions that can provide lower rates or exemptions from withholding taxes on dividends, royalties, and interest paid to the Cyprus company. The EU parent-subsidiary directive also applies in Cyprus for transactions between EU related entities.
Cyprus may also be an interesting EU location to set up an intra-group financing company – interest income closely connected in the ordinary course of business is subject to corporate tax (12.5%) and exempt from SDC, otherwise, it would be taxed under the SDC and exempt from corporate tax.
There is also an IP box that provides 80% exemption on qualifying IP exploitation profits. The IP Box exemption is subject to the company conducting substantial economic activities within Cyprus and having adequate R&D expenditures.
Cyprus also allows for group loss tax relief. The loss in one company may be set off against the profit of another company within the same group structure. The two companies will qualify if both are residents of Cyprus, the group ownership exceeds 75% and they have been related entities for the whole tax year.
For a holding structure to benefit from the aforementioned tax benefits and access tax treaties, it needs to be considered a tax resident company. Cyprus corporate residency rules look at the location where the company is effectively controlled and managed rather than where the company is incorporated.
This means that a company incorporated in Cyprus but managed from abroad won’t be a resident for tax purposes and, therefore, not subject to tax in Cyprus. This exposes the entity to become tax resident elsewhere and lose access to Cypriot tax treaties benefits.
To obtain a Tax residency certificate, effective management and control are assessed on a case-by-case basis and subject to specific circumstances of a given company. If a Cypriot company is pursuing tax residency in Cyprus, it is usually recommended to have the majority of the board of Directors residents in Cyprus (excluding nominees issuing PoA), board meetings in Cyprus, have a physical office, keep commercial and accounting records within the country and operate with a bank account in Cyprus.
As we commented in previous articles, Cyprus is currently in the process of implementing EU ATAD1 directives in its local laws which will implement interest deductibility limitations, controlled foreign company (CFC) rules and exit taxation, among others. With respect to CFC rules, undistributed income from a CFC would be taxed only if it is derived from non-genuine arrangements to create a tax advantage.
With regard to transfer pricing, transactions between related entities should also be conducted following the OECD’s arm’s length principle, including disregarding transactions without commercial substance for tax purposes. Simplified transfer pricing procedures apply to intra-group financing companies with an adequate economic substance in Cyprus, among other requirements. Cyprus UPEs from large multi-national groups (over EUR 750 mil of consolidated annual revenue) must file CbC reports.
Offshore jurisdictions, such as Cayman Islands, BVI, Bermuda, among others, can also be considered for holding purposes. Generally, no form of tax applies to income received, whether active or passive income, and payments to non-residents.
There is also nil tax reporting, although several offshore jurisdictions such as BVI, Cayman, among others, are implementing CbC reporting for large multi-national groups with presence in the jurisdiction.
However, there are certain caveats to consider when incorporating a holding in an offshore jurisdiction.
To begin with, most offshore jurisdictions do not have double tax agreements (DTA) with other jurisdictions.
Consequently, although income received by the holding may be exempt from tax, depending on where the child companies are located, withholding taxes on dividends, interest, and royalties will be applicable. By a way of example, a German AG paying dividends to a BVI Holding may face a 25% withholding tax, as opposed to no withholding tax if the holding was to be located in Cyprus and to meet substance requirements. Furthermore, other anti-avoidance and anti-abuse provisions may apply at the subsidiary level, depending on where it is incorporated.
In addition, as there are no DTAs in place, a given company could be deemed tax resident in two jurisdictions if the other jurisdiction deems that the offshore holding is controlled and managed from there.
There are certain exceptions, some ‘mid-shore’ jurisdictions such as Labuan (Malaysia) and Mauritius, do have a number of DTAs concluded.
A Labuan Holding, which may not be subject to tax on certain passive income such as dividends, may have access to certain Malaysian tax treaties (some of them specifically exclude Labuan).
Another option is a Mauritius Global Business License Company (GBL), which may be taxed at an effective tax rate of 3% on investment income, but that has access to more than 30 DTAs concluded by Mauritius. However, both Labuan and Mauritius companies are required to have economic substance within the jurisdiction to be considered tax residents there.
For instance, Labuan holdings would be required to have a minimum of 2 full-time employees in Labuan and a minimum annual expenditure in Labuan of RM 50,000.
For its part, Mauritius requires GBL companies to have two resident directors and investment holdings are required to have annual expenditures in Mauritius of at least USD 12,000, whereas non-investment holdings require USD 15,000 of expenditures and 1 employee if annual turnover is less than USD 100 million or 2 employees if annual turnover is more than USD 100 million.
Furthermore, not only Labuan and Mauritius but a number of tax-neutral jurisdictions are implementing economic substance requirements for holding companies. BVI, Cayman Islands, Bermuda, Bahamas, Turks & Caicos, Anguilla, Jersey, Guernsey, Isle of Man, among others, have already enacted legislation on this matter – and we can expect that other offshore jurisdictions will follow shortly. We discussed it in this article and this other article.
Pure equity holding companies may be subject to reduced substance requirements. For instance, a holding which only activity is receiving dividend income and deciding when to make distributions and how much might fulfill substance requirements by having a local director or hiring a management company and having an office space within the jurisdiction, which may be on a non-exclusive basis. This would be commonplace for any family office, shared family office or fund administration – and would not be difficult to implement.
However, holding companies conducting other group activities such as financing, IP business, leasing or certain other commercial activities may be subject to a more comprehensive set of substance requirements. These include conducting core income-generating activities from within the jurisdiction of domicile, being directed and managed from within the jurisdiction, having an adequate amount of operating expenditures incurred in or from within the jurisdiction, having an adequate physical presence (physical offices ) and number of full-time employees or other personnel with appropriate qualifications in the jurisdiction.
Companies receiving IP income from affiliates that have not created such IP or do not conduct R&D activities within the jurisdiction are subject to enhanced economic substance requirements.
To be exempted from economic substance requirements a given company must prove its tax residency elsewhere. Non-compliance may imply fines, sharing of information with jurisdictions of tax residency of the UBOs and potentially forced liquidation of the company.
All companies subject to economic substance may require filing an annual declaration and provide certain information on how requirements are met.
The Bottom Line
When it comes to structuring there is no ‘one-size-fits-all’. The most suitable jurisdiction for your holding structure will largely depend on the location of its subsidiaries or ultimate parent entity (if any), type of assets held and activities conducted, structuring objectives and requirements, and the personal circumstances of its shareholders/ultimate beneficial owners, among other variables.
Today, we have reviewed a few jurisdictions and legal entities which are commonly used for holding purposes, but there are many others that may suit your specific situation.
For instance, Liechtenstein provides for tax exemptions on dividends received, capital gains from the sales of shares and on withholding taxes. Furthermore, Private Asset Structures that do not conduct economic activity and are managed by persons other than the UBOs may enjoy tax exemptions and are only subject to a minimum tax of CHF 1,800 per annum.
Switzerland may also be suitable. The country has federal tax exemptions on dividends and capital gains accrued if certain participation conditions are met. A holding company regime that provides communal and cantonal tax exemption is available but may be repealed shortly pending public referendum ratification as we commented in this article.
Malta has also been a common jurisdiction for holding purposes. Actually, a number of Malta companies operate with a dual structure, whereby a Malta holding can claim tax refund benefits and re-inject capital to the operating subsidiary.
UK Limited companies may also be a suitable vehicle as holding companies because of the ability to leverage over 100 tax treaties that the UK has concluded. Also, tax exemptions on capital gains on the sale of shares and dividends received, provided that certain requirements are met, as well as no withholding tax on dividends paid to non-residents. However, one should note that the Brexit may leave out the UK from the EU parent-subsidiary directive.
For enhanced asset protection purposes, Panama Foundations and Nevis LLCs in combination with trusts have also been largely used to hold private assets. Although, recent legislative amendments provide certain uncertainty on how Nevis companies will be treated locally for tax purposes and further tax and corporate law changes are expected. For instance, Nevis is currently in the process of repealing the current Trust legislation and enacting an updated one.
These are just some options that one might consider. A holistic approach should always be taken, both the location of the holding and the subsidiaries matters and an isolated decision should never be made. Some aspects are more financially related, others more commercially oriented but both are important and should be taken into account.
However, as we have pointed out several times, economic substance is key in any structuring or tax strategy. Currently, optimized structures might only be effective if there is economic and commercial substance, intra-group transactions are at fair market value and are transparent to tax authorities.
When it comes to structuring a business group, one should carefully analyze these and other factors, requirements, priorities and strategic goals to choose the appropriate jurisdiction to incorporate.
At Flag Theory, we can help you leverage global structuring opportunities for your holding and group structure – with a global approach and jurisdictional comparison intelligence customized to your specific business circumstances – so you can benefit from the highest protection, risk and tax minimization and smooth business operations. Contact us today, it will be a pleasure to assist you.