In 2020, holding company remains an effective market instrument for doing business, managing the production chain, minimizing overhead costs, reducing competition in a particular sector of the economy and solving many other tasks. The mechanism using a single executive center is in many cases more efficient than other types of business organization. Today we will talk about specific jurisdictions where incorporating a holding company in 2020 is worth it.
But before we go directly to the topic of this article, we suggest looking at the historic background. This will allow us better understanding of specific examples, as of what a classical holding is, and make sure that such company organization is not yet a dead theoretical concept, but a real business instrument.
Let us assume that few of our readers have heard of Berkshire Hathaway (BRK.B). But one cannot say it about its CEO, the real wolf of Wall Street, the Great and Terrible Warren Edward Buffett. The company we mentioned above was originally a textile manufacturer and had no connection to the large financial business.
Buffett first invested money in it, after which he became its owner. And then he started using Berkshire Hathaway to invest in other companies. Some of them remained independent, but some were completely taken under the wing of BRK.B. What does this have to do with the topic of our today’s article, you might ask. A lot.
In fact, Berkshire Hathaway is a classic holding company. That is, the company invests in other businesses and buys out significant (often controlling) blocks of shares, which in turn allows it to gain full control over them. Another example of the holding company effective use is Restaurant Brands International. Few people have heard of this company, but many know about its protégés, the Burger King chain, Tim Horton’s and Popeye’s Louisiana Kitchen.
We kindly suggest you read the important information below:
- In 2020, holding companies can be established in any jurisdiction, not only in those we will talk about today. Singapore, Hong Kong, the Netherlands, Cyprus are the most advantageous options, but they are not the only ones. In some (quite rare) cases, alternative countries will be a justified solution.
- We guarantee the relevance of the information in the article and all the facts contained therein, but only as of the date of publication (June 6-7, 2020).
- The structure of this article actually comes down to listing the advantages of each jurisdiction in terms of doing business built up on the use of holdings. These same factors in many cases can be extrapolated to other forms of business entities.
- We are not ready to assume responsibility for the possible negative consequences resulting from the use of information, facts and business mechanisms contained in the article. In fact, this is an informational, i.e. theoretical article, not a guideline to follow. Should you need practical advice, please contact our experts by email (firstname.lastname@example.org), or in any other way convenient for you (you can find our available communication channels here).
The jurisdiction provides especially favorable conditions for business. It is rightly considered to be the gateway to the market of the South-East Asian region. In the 1950-1970s, the country made a dizzying pirouette in its development and became an economic leader without any mineral wealth, environment for tourism or any favorable prerequisites for industrial production. Lee Kuan Yew is to be thanked for this. In this case, the word Great should really be capitalized, as this person had done more for Singapore than any Prime Ministers and Governments both before and after.
Warning! All the information on taxes or related to the advantages of a particular jurisdiction is given in the general case, i.e. it does not take into account the rare exceptions.
Main advantages of the jurisdiction:
- Political and economic stability;
- Unambiguous rule of law and equity;
- Reasonable tax policy;
- Reasonable policy of regulatory structures;
- Multiple sources of additional financing for start-up companies;
- Developed banking sector.
Participation in international organizations.
Singapore has established diplomatic relations with 186 states, but not all of them have embassies. It is a member of the United Nations (UN), the British Commonwealth, the Association of Southeast Asian Nations (ASEAN), Non-Aligned Movement, and the Asia-Pacific Economic Cooperation (APEC). Thanks to its close partnership with many countries and conscious distance from any conflict, Singapore is a good choice for hosting headquarters and regional offices. Especially, if their priorities are to attract venture capital.
Taxation is based on the territorial principle. This means that there are two categories of income subject to taxation, income received within the jurisdiction and abroad (in the latter case, provided that the amounts were transferred / paid to Singapore). This system makes foreign business especially attractive and profitable. Therefore, when choosing a jurisdiction for your holding, the option of Singapore should be considered in the first place. Royalties and some maintenance fees paid to foreign companies are taxed at the rates of 10% and 17% (if there is no corresponding agreement), which also looks very good.
Subject to certain conditions, dividends may be exempt from corporate tax. This means that undistributed income of foreign subsidiaries may not be taxed, yet not always. This depends on the tax status of the jurisdiction where the income was received (one will have to pay their taxes in the neutral or low-tax jurisdictions).
In 2020, holding companies in Singapore usually do not pay capital gains tax. Therefore, there is no transfer tax on the sale of shares. However, in some cases such income may be regarded as ordinary with all the ensuing fiscal obligations.
IP holdings may use several mechanisms to obtain tax benefits. The Government stimulates the development of such structures, in particular by setting reduced tax rates of 5% and 10%. Let us clarify that the IDI (IP Development Incentive) Rules may be revised and made public in the near future.
What else to pay attention to:
- Deductions are available for R&D costs, registration and licensing of IP.
- Double taxation agreements have been concluded with more than 80 jurisdictions. Therefore, dividends, royalties and interest may not be taxed, or reduced rates will apply (if all of them are paid to subsidiaries).
- To receive fiscal preferences, a company must be a tax resident. The informal rule of Control and Management (the place where decisions are made and business is managed) is used for this purpose.
- Foreign holding companies are usually (but not always) considered non-residents. In order to change this status, one must submit a special application to IRAS (Inland Revenue Authority of Singapore). If the application is approved, the Authority will issue a COR Certificate (Certificate of Residence). But this document is not recognized by all jurisdictions.
- If the gross income exceeds 10 million SGD, the company may be required to present transfer pricing documents (not for all operations).
- Singaporean Ultimate Parent Entities (UPE) with consolidated income of more than 1.125 billion SGD, are required to provide information for each jurisdiction involved. It describes taxes, income, employment, capital, retained earnings, assets and business transactions.
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Hong Kong is one of the largest business, economic and financial centers in Asia. It is an everlasting competitor of Singapore in terms of leadership positions in the region. It offers a favorable tax regime, favorable laws, simplified access to the Chinese market and many other advantages. The only point that might significantly reduce its business attractiveness in the long run is the full integration of Hong Kong and China that is expected to be completed by 2047. However, China’s leadership claims that it will not bring any restrictions to the business sector. For the moment, Hong Kong remains an extremely advantageous jurisdiction for business, including the use of holdings.
Here are the main advantages of the jurisdiction:
- Simplified procedure of incorporating new companies;
- Favorable tax climate;
- Open economy;
- Minimal risk level;
- Extremely advantageous geographical position;
- No offshore status;
- British legal system;
- Territorial principle of taxation;
- No currency control;
- Simplified tax and financial reporting;
- Low company maintenance costs;
- Minimum administrative barriers;
- Allowed nominal service;
- Almost complete absence of corruption.
All of this suggests that Hong Kong is one of the best options for a holding-based business, especially if there are no requirements for guaranteed stability in the long run. Certain difficult issues of the jurisdiction should be kept in mind, but they can be resolved one way or another. In any case, if you are interested in the Asian region, the choice between Hong Kong and Singapore will be very difficult.
What else to pay attention to:
- There is no tax on dividends, as well as on capital gains and transfer of shares.
- There are no legal provisions on CFC (Controlled Foreign Companies). Therefore, undistributed income from subsidiaries cannot be attributed to the parent company based in Hong Kong.
- IP-related royalties (intellectual property) are usually taxed at the rate of 30% of the total income. In some cases, the fee is 100%.
- Hong Kong has DTA agreements (Double Tax Agreement) with more than 50 countries. Consequently, subsidiaries from these states can enjoy significant tax benefits.
- The tax on income that was generated on the basis of intra-group lending is equal to the standard, 8.25% or 16.15%.
- In some cases, in order to obtain the fiscal benefits, a business entity must clearly prove that it is controlled and managed from internal sources. The certificate of the current status is issued by the IRD (Inland Revenue Department).
- It is difficult but not impossible to prove the status of a tax resident (and, as a result, the right to significant fiscal loosening). The IRD also deals with this issue. Unfortunately, there is no list of standard requirements and verification methods.
- Transfer Pricing (TPD, Transfer Pricing Documentation) is codified on the basis of a special resolution (No. 6, 2018). Which, in turn, is part of the Inland Revenue Ordinance (IRO).
- Hong Kong companies working with affiliates are required to prepare two special files, a global and a local one. Under certain conditions, this requirement is lifted.
- Special country-by-country reports (CbCR) are mandatory provided that the consolidated income of the entire group exceeds HKD 6.8 billion.
The economy of the jurisdiction is one of the most stable in Europe. The country has successfully overcome all the consequences of the 2008 crisis and is actively developing. Despite the lack of territory (just over 41.5 thousand square kilometers) and a relatively small population (17.3 million people), the jurisdiction has proved that its attractiveness for business depends not on the availability of mineral resources and cheap labor, but on the ability to manage what is already there. The Netherlands is one of the most advantageous options if you wish to do business on a holding basis in a solid European country.
Please have a look at the main advantages of this jurisdiction:
- Highly qualified labor force;
- Favorable geographical position;
- Direct access to the sea;
- Effective social policy, guaranteeing the absence of any cataclysms in society;
- Low inflation, just 1.3%;
- Controlled unemployment rate of 4.7%;
- Highly developed post-industrial economy;
- 73% of GDP falls on the service sector (so the dependence on raw materials and minerals is minimum);
- Stable financial system;
- The law provides for the special economic regime zones (for example, Curacao);
- Established trade relations with Germany, United Kingdom, Belgium and France.
The most important advantage of the Netherlands is the multitude of tax agreements officially resolving the issue of avoiding double taxation. This fact automatically made the legal structure of Dutch BV extremely attractive for international business, because the format provides full access to all tax benefits and privileges.
The only point that can be called a relative disadvantage is the GAAR (General Anti-Avoidance Rules). In fact, it is a set of rules that defines the concept of unjustified tax benefits. In other words, a company may be declared a tax evader even if it complies with the letter of the law, but not the spirit (and this is important!) of the law. Therefore, if you are interested in a holding company in 2020, and you have chosen the Netherlands, the consultation of a competent expert from the internationalwealth.info portal is highly desirable.
Dividends, royalties, interest
If they are paid by local holdings, you may qualify for substantial tax benefits as source (if all legal requirements are met). No income tax is levied on interest or royalties. For a long time there was information circulated among insiders that dividend tax would also be reduced to zero, but these plans have not materialized so far. There is a 23.9% tax on intra-group financial transactions, but its destiny remains uncertain.
If a number of conditions is met, dividends and capital gains can be fully exempt from corporate net profit tax (in the regular mode it is 19%, or 24.3% for profits up to 200 thousand euro and more). Capital losses are not subject to taxation, but there are certain exceptions to this rule.
Controlled foreign companies
For such organizations, undistributed income (it includes a typical gentleman’s set, interest, dividends, royalties, capital gains and some other types of income) is subject to corporate tax. This rule applies to CFCs registered in low-tax jurisdictions, provided that a Dutch company has the interest of at least 50% in such a firm.
There are two exceptions to this rule:
- Passive income is less than 30%;
- The subsidiary meets a set of requirements determined in advance by the regulator.
We have already talked many times about the importance of real presence in a jurisdiction. Holding company in 2020 in the Netherlands is yet another proof of this. In addition, such organizations may be required to obtain a tax residence certificate in order to be eligible for benefits.
Requirements to the status assessment are standard and are limited to determining the place where:
- … important decisions are made;
- … directors work and meet;
- … accounting is carried out, and financial/tax reports are prepared for submission.
In addition, there are other important conditions that apply (qualification of directors and staff, minimum recruitment costs of at least EUR 100,000, etc.). Let’s specify that such requirements apply to foreign intermediate holdings.
What else should one pay attention to:
- Capital gains tax applies to the internal transfer of assets in the direction of a Dutch company to other jurisdictions, as well as to the transfer of tax residency outside the Netherlands.
- In the Netherlands, the transfer pricing rules apply in full.
- All transactions between related entities are carried out under the OECD rules (Arm’s Length Principle).
- Local and main file requirements apply to entities with revenues exceeding EUR 50 million.
- Country Reporting Requirements (CbCR) apply if the income exceeds EUR 750 million.
Our rule is to try to distance ourselves from products and services that everyone offers. And it’s not about being snobbish at all. The Like Everybody Else service format can hardly be called especially profitable. And in the global sense, the economic future of Cyprus is not as cloudless as we would like it to be. But even taking into account all of these factors, the jurisdiction still remains extremely attractive for international business. And it is difficult to argue with that. The country has experienced hard times of recession and started to gradually emerge from its prolonged fall. We cannot predict where Cyprus will end up, but the current trends are such that there is hope for a brighter future.
Here are the main advantages of this jurisdiction:
- No taxes on dividends, royalties and interest;
- There are no taxes on any transactions related to securities;
- There are no taxes on operations with foreign real estate;
- There is no tax on inheritance. This important advantage greatly simplifies the transfer of assets from one generation to another within a family;
- Owning a company in Cyprus, you can apply for reissue of the island real estate that you have at reduced rates;
- Cyprus offers the lowest corporate tax and VAT (12.5% and 19% respectively) in the European Union.
Despite somewhat sad start, Cyprus still remains one of the best European jurisdictions should you plan to establish a holding company. No other country in the European Union will offer similar conditions. And taking into account the fact that many businessmen wish to work exclusively with Europe, distancing themselves from offshore and midshore formats as far as possible, Cyprus will have literally no real competitors.
If capital gain is obtained through the sale of securities, it will enjoy guaranteed tax exemption. This fact alone makes classic limited liability companies an excellent instrument for the investment holding business in Cyprus. Let us mention one more good thing: there is no transfer tax on the sale of shares.
As for real estate transactions, the tax rate (subject to certain conditions) will be 20%. This is true for two cases. 1) If capital gains are received from real estate in Cyprus. 2) It was received from a company that owns (both directly and indirectly) such real estate (at least 50% of the market price of shares).
If they are received by a holding, and the resident status of the source usually does not matter, you can count on zero corporate tax (when the standard mode it is 12.5%). At the same time, it should be understood that dividends from foreign companies should not be deducted for source taxation purposes, even if you want to obtain exemption from local taxes.
We should especially mention the defense tax (SDC, Special Defense Contribution). It is imposed on dividends (including conditionally distributed dividends). However, there are many subtleties to it, which in many cases allow the SDC to be reduced to zero on the perfectly legal grounds. For example, if the shareholders of a business entity are not local tax residents.
As for dividends from foreign sources, an exemption from SDC is also available for them. There are two conditions to be met: 1) The company’s income from investments must not exceed 50% of their total volume. 2) The paying company operates at a tax rate of at least 6.25%. Please note that you can use a unilateral tax credit against SDC to pay foreign tax.
Foreign shareholders are in a privileged position in Cyprus. This means that dividends paid to them by a Cyprus company, as well as interest and royalties, are not subject to tax. However, if the rights are used in Cyprus, the royalties can be taxed at the rate of 10%. One should also consider the impact of double tax agreements (with more than 50 jurisdictions) and various EU Directives.
What else one might pay attention to:
- Cyprus can be used for a so-called intra-group financing company. Interest income in the ordinary course of business is subject to corporate tax at the rate of 12.5%, but is exempt from SDC. Otherwise, the situation will be directly the opposite.
- If a number of conditions is met, you can expect an 80% exemption from taxes derived from the use of IP.
- Cyprus laws provide for group loss privileges, when the losses of one company can be covered by the profits of another (provided that they are part of a single organization, the share of ownership must be more than 75%, and the organization must have a resident status in Cyprus).
- In order to qualify for the benefits and privileges, a holding must necessarily have the resident status. Please note that the jurisdiction from which it is managed is decisive in determining this, but not the place of registration.
- It is highly desirable to think of acquiring the real substance (a full-fledged office, commercial operations, etc). In addition, it is recommended that the account should be opened with a local bank.
- Cyprus corporate law takes into account the EU ATAD1 Directive. In the early 2019, three main provisions were implemented: Interest Limitation Rule, Controlled Companies, GAAR. In 2020, two more provisions were added. Exit Tax (taxes on withdrawal of assets) and Hybrid Mismatch Rules (combating hybrid schemes). It is too early to speak about their impact on business, but if you are in the process of implementing a holding project, these points should be kept in mind.
- All transactions between related organizations must comply with the Arm’s Length Principle.
- Simplified transfer pricing procedures are allowed (with a number of conditions).
- Large (more than EUR 750 million of income) Cyprus Ultimate Parent Entities that are part of multinational groups must submit reports to CbC.
In the long-term perspective, the destiny of purely offshore areas in the global economy remains unclear. The measures taken by regulators and the war on tax evasion, money laundering and erosion of the tax base no longer give us reasons to recommend such jurisdictions for doing business without any reservations.
However, this does not mean that offshore jurisdictions can and should be considered as retired. In many cases they are still the best choice, although not as obvious as they were 10 to 20 years ago.
All the detailed information on such jurisdictions could make the article too long, so we decided to limit ourselves to giving a list of the most important features related to doing business in the offshore jurisdictions as holdings. Should you need a detailed analysis of a particular territory, or an expert opinion on a project, please feel free to contact us by email (email@example.com).
What should one pay attention to:
- Income received in certain offshore jurisdictions (Cayman Islands, British Virgin Islands) is not taxed at all, regardless of whether it is passive or active. The same applies to payments in favor of non-residents.
- Most often there are no tax reporting requirements, although certain jurisdictions are gradually implementing the CbCR provisions for multinational groups.
- Most of the offshore jurisdictions do not have double tax agreements. This means that taxes on interest, dividends and royalties are applied on a standard basis. Or, which is also true, a company will be legally considered a tax resident of two jurisdictions at once. There are exceptions to this rule (Labuan, Mauritius), but they only confirm the general trend (please see the next section).
- In certain cases, in order to maintain the reduced maintenance requirements for the company, it is sufficient to hire a local director or a management company from the same jurisdiction, or get a real office.
- Holding companies engaged in certain types of business (finance, intellectual property, leasing, etc.) may be challenged to meet tougher requirements. The same can be said of organizations that receive IP revenues from their affiliates that either did not establish such an IP on their own or do not work in the R&D field.
- The burden of proving the residency in another jurisdiction rests with the company. Sanctions for non-compliance with this requirement are quite severe: fines, transfer of tax information or even forced liquidation.
- The requirements of the Economic Substance must also be considered. This concept assumes that any transaction must have an actual purpose different from that of reducing the tax burden. This means that the company may be required to submit an annual financial report.
We considered it would make sense to include these two jurisdictions in a separate block, as they offer the most favorable conditions for holding business among all of the offshore jurisdictions. But let us once again remind you, dear readers, that the final decision should be made based on all the available factors.
What would we pay attention to:
- A holding in Labuan may not (but should not by default) be taxed regarding certain types of passive income.
- You may also use double tax agreements concluded by Malaysia, unless they explicitly exclude Labuan.
- Alternatively, you may use a GBL (Global Business License) company in Mauritius. The effective tax rate on investment income there is 3%, but there are no restrictions on free trade agreements (more than 30 in total).
- The requirements to the transaction’s economic substance have not been waived by anyone and should be complied with. At least, if you want your company to be considered a tax resident.
- In Labuan, incorporation of the holding company will require two full-time employees (at least), and annual costs in the jurisdiction of at least 50 thousand RM (1 USD is 4.09 Malaysian ringgits, as of late November 2020).
- Mauritius requires two resident directors, and the minimum cost bar for investment holdings is set at the level of 12,000 USD. The same figures for non-investment holdings are slightly different, one employee and 15,000 USD, provided that the annual turnover does not exceed 100 million USD.
alternative options, conclusions
This business format may be attributed to the type for which general advice and theoretical recommendations are somewhat similar to such an important indicator as the average body temperature of a hospital’s patients. It is informative, solid, but has absolutely no sense. It means that implementation of a holding project will require an in-depth analysis of all the available factors, including the following:
- Location of subsidiaries and the parent organization itself;
- Type of assets to be held;
- Type of business;
- Structured objectives and requirements;
- Individual features of the organizational structure (including factors that depend on shareholders);
- Desires of the final beneficiaries.
This means that any of the jurisdictions considered in the article cannot be unambiguously recommended. If necessary, our experts will offer you several alternatives, the advantages of which are manifested by a number of rare factors.
Here is the list of jurisdictions that are also worth considering as possible locations for a holding company in 2020:
- Liechtenstein. Here, the law provides quite significant benefits for a) dividends received; b) capital gains from the sale of shares; c) withheld taxes. In addition, under certain conditions (no business activity, a company is managed by persons with no UBO / Ultimate Beneficial Owner status), private asset structures are subject to a minimum tax of CHF 1,800 per year.
- Switzerland. Fiscal incentives (dividends, capital gains, etc.) are also applicable in the jurisdiction. There is a special holding regime that actually reduces cantonal and communal taxes to zero. However, its future destiny remains uncertain. Another argument in favor of Switzerland is an extremely stable banking sector.
- Malta. A number of companies from this jurisdiction operate under a dual structure, which, in general, makes it possible to file for tax refunds and re-infuse the capital into a subsidiary (subordinate) company.
- United Kingdom. The main advantage of British holdings is more than a 100 tax agreements concluded by the United Kingdom. There are also a few national benefits (e.g., capital gains on the sale of shares and the receipt of dividends). But Brexit, the consequences of which are just beginning to show, makes the situation in Britain unstable. At least because this step is essentially incompatible with the EU Subsidiaries Directive.
- Panama Foundations, Nevis LLC. These options are not bad (especially when combined with trusts) for keeping private assets. However, they are not devoid of significant disadvantages. Panama, due to its somewhat tainted reputation, and Nevis due to its legislative initiatives that are expected to have a significant impact on corporate business.
Also we would like to remind you, dear readers, that one of the most important requirements to the legality of the mechanisms described in the article concerns the economic and commercial nature. In other words, if any activities are aimed solely and only at reducing taxes, they can either be blocked or lead to significant unpleasant consequences for the company.
But in any case, a holding company in 2020 is a real economic instrument, even if it is highly specialized. Its application requires compliance with certain rules, but the advantages of this mechanism can cover many disadvantages and limitations. Should you need any additional information on this issue, please do not hesitate to contact our experts by email (firstname.lastname@example.org), or choose an alternative option for communication.