Offshore tax article - The Best Holding Company Jurisdictions
The establishment of a holding company can be very beneficial if you're looking at international trading. One of the key reasons for this is that countries often impose withholding taxes on outgoing payments of dividends, interest an royalties. If you can route dividends through companies with favourable double tax treaties you can avoid many of these tax retentions.
The key issues when looking at the establishment of such as company are:
- nil or low withholding taxes on dividends from subsidiaries to the holding company. This will be a liability in the subsidiaries jurisdiction, and therefore if any subsidiaries are located in tax havens such as the BVI or the Bahamas there will be no withholding taxes levied. For other jurisdictions you would need to look to the number and terms of double tax treaties to determine how the withholding taxes are reduced or eliminated.
- no tax in the holding company jurisdiction. As well as having low overseas taxes on incoming dividends it is also important that the holding company jurisdiction does not levy significant taxes. Many of the preferred jurisdictions will exempt such dividends.
- Nil or low withholding taxes on dividends paid from the holding company to the shareholder.
Although maybe not a crucial immediate issue you should also consider whether the holding company would be subject to any tax on a future disposal of the subsidiaries, or whether there would be any tax on a disposal of the holding company shares.
It will also need to be considered whether the holding company jurisdiction has any special provisions that applies to dividends from tax haven jurisdictions given that some subsidiaries may well be located in such countries.
Looking at some of the preferred jurisdictions in turn:
Malaysia
When considering Malaysia you would usually use a Malaysian holding company which is 100% wholly owned by an offshore Labuan company.
In terms of the Withholding Taxes on Incoming dividends you would need to review the double tax treaties for all jurisdictions in question, as it is the treaties that would be of crucial importance. The treaty between Holland and Malaysia for example provides for no withholding taxes to be deducted on dividends paid from a Dutch subsidiary to a resident Malaysian holding company.
The scope of Malaysian taxes is limited by the principle of territoriality. This means that any income earned outside Malaysia, is exempt from Malaysian taxes even though it is paid to a Malaysian company. Therefore dividend income from an overseas subsidiary would be excluded from Malaysian taxes.
Note that transfers between the Malaysian and Labuan companies would be free of taxes including withholding taxes.
Any dividends payable to a UK shareholder would then be from the Labuan company and would be free of withholding taxes.
Any future disposal of the shares in the subsidiaries by the Malaysian company would again be free of CGT.
Therefore the Malaysian holding company option provides a method of avoiding corporation tax and outgoing withholding taxes. The treaties between Malaysia and the subsidiaries are of crucial importance, however it is fair to say that it is at a disadvantage over the European holding companies as it is not entitled to the benefits of the EU parent/subsidiary directive which can eliminate withholding taxes on dividends between EU companies.
Bermuda does not apply a corporate income tax to corporations, however, there are economic substance requirements that should be taken into account for Bermudian resident entities...keep reading
Although the Bahamas does not levy corporate income tax, it does have economic substance requirements for certain Bahamanian entities. In this report we look at the scope of these requirements....keep reading
Although there is no corporate income tax in the BVI, there are economic substance requirements for certain resident companies...keep reading
Although there are no corporate income taxes in the Cayman Islands, there are economic substance requirements, which apply to a number of companies incorporated or registered there. In this article we look in detail at the scope of these requirements...keep reading
Switzerland
Swiss companies can be taxed on their income at both federal and cantonal level. There are however specific tax reliefs for Swiss holding companies. Effectively this is a holding company that does not conduct business in Switzerland and the deeds of the company specifically state it is a holding company.
The net effect of being classed as a holding company is that there is no cantonal tax, and the federal income tax is an effective rate of almost 8%.
There is however a participation exemption that applies where the holding company owns more than 20% of the shares in the subsidiary. In this case dividend income received from the subsidiary is effectively received free of income tax. Therefore importantly the Swiss holding company should also be effectively tax free for dividend receipts and as there are no controlled foreign companies regulations the fact that dividends are received from tax havens would not impact on this.
The downside is that the standard Swiss withholding tax rate is 35%. However it does have some treaties that can reduce this to 5%/15%.
In terms of dividends received by the Swiss company from subsidiaries you would need to look to the available double tax treaties. Most treaties apply a 15% treaty rate, however Switzerland has signed an EU agreement such that dividends paid by subsidiary companies to a Swiss holding company are not be subject to taxation in the subsidiary country if the holding company has a minimum holding of 25 % of the share capital for at least two years and one company is resident for tax purposes in an EU member state and the other company is resident for tax purposes in Switzerland. This therefore puts Switzerland in the favourable position of being able to receive dividends EU states free of withholding taxes.
Cyprus
The general rule is that taxable profits of all Cyprus companies are now taxed at the rate of 10%. However Cyprus also has a special regime for holding companies
Dividend income from an overseas subsidiary to a Cypriot holding company is exempt from corporation tax provided the holding company owns at least 1% of the share capital of the subsidiary
Note that this exemption will not apply if the company paying the dividend engages in more than fifty per cent (50%) of its activities in producing investment income and the foreign tax burden on the income of the company paying the dividends is substantially lower than that in Cyprus. In this case the Cyprus company would be subject to a tax rate of 15%.
However provided the overseas subsidiaries are trading the fact that dividends are from a tax haven would not result in a Cypriot tax charge.
There is no withholding tax on the payment of dividends from Cyprus to the UK or US shareholder and any gain on the sale of the shares would be exempt from corporation tax
Therefore of key importance is the withholding taxes on the payments to the holding company.
Cyprus has fewer treaties than other jurisdictions such as Denmark or Switzerland but the provisions can be beneficial. Dividends from countries such as Bulgaria, Greece, Ireland, Malta and Russia are not subject to withholding taxes.
In addition as its party to the EU parent/subsidiary directive dividends from EU companies should be free of withholding taxes.
Therefore like Switzerland, Cyprus is effective in that it exempts dividends from tax in Cyprus, has no CGT on disposal, and does not impose a withholding tax on outgoing dividends. In terms of incoming dividends it is very efficient as a holding company of East European companies given the number and nature of treaties with Eastern Europe. It would therefore be an effective intermediary holding company for shares in a Bulgarian company as dividends could pass free of withholding taxes to the Cyprus company and then onwards to the ultimate holding company.
Australia
Dividends paid by foreign subsidiaries to an Australian holding company will generally not be subject to Australian tax. This applies because there is a 'participation exemption' which applies to exempt dividends from companies resident in any country. Therefore any dividends received from a BVI or Bahamas resident company would still be exempt for Australian tax purposes subject to the controlled foreign company rules.
Therefore Australia would be tax efficient in terms of Australian taxes.
In terms of dividends payable to a UK shareholder under a recent Australian finance bill there is an effective exemption from Australian dividend withholding tax for most forms of non-assessable foreign income. This should therefore exempt the dividend to the shareholder from Australian withholding taxes.
In terms of dividends payable to the Australian holding company from subsidiaries, any dividends received from a tax haven would clearly not be subject to withholding taxes. Many other jurisdictions would all be reduced by the relevant double tax treaty to 15%.
Finally under new proposals the participation exemption would apply for CGT purposes such that the holding company could dispose of shares in the subsidiaries free of Australian CGT providing none of the subsidiaries invest or trade in Australia.
Australia could therefore be advantageous in terms of local taxation, CGT and outgoing dividends. The main tax cost would be withholding taxes on incoming dividends, which although reduced would be at around 15%.
Maderia
Madeira has a special regime for holding companies
In terms of domestic taxation on the receipt of dividends from EU subsidiaries it would be subject to tax at a low rate of 1.8%. However dividends from non EU subsidiary companies would not be taxed.
As a party to the EU parent/subsidiary directive any dividends would be received from EU companies free of withholding taxes, and non EU jurisdictions would be dependent on the terms relevant double tax treaties.
In terms of withholding tax rates on dividends payable to the Madeira company example rates are:
Bulgaria 10/15%
Germany 15%
India 10/15%
UK NIL
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