Choosing right jurisdiction for a holding company

You must be aware of three things when choosing a right jurisdiction for a holding company:

(a) Taxation of incoming dividends;

(b) Corporate income tax on received dividends;

(c) Taxation of ongoing dividends.

a) Incoming dividends from a subsidiary company must be either exempted from withholding tax or be subject to the convenient tax rate (i.e. 5%-10%). This can be achieved by having in place a convention for avoidance of double taxation (DTA) between two states where the parent company and the subsidiary are located.

If the parent and subsidiary companies are located in the EU member states no withholding tax is levied on such dividends from the subsidiary according to the EU parent/subsidiary directive. This rule applies where the parent company holds more than 10% of stake in its subsidiary.

b) As the common rule the funds received by the parent company from its subsidiary as dividends are subject to the corporate tax of such parent company. It is vital for the holding jurisdiction that the funds received as dividends are exempted from corporate tax or reduced through tax credit method.

The Netherlands, for instance, apply the ‘participation exemption rules’ the gist of which is to exempt incoming funds from the subsidiary from taxation on the parent company level. Nevertheless, the ‘participation exemption rules’ apply if the following conditions are met: the Dutch holding must own at least 5% of shares of its subsidiary, such shares must be held from the beginning of fiscal year, the subsidiary profit must be taxed, the parent company must be actively involved in the business of its subsidiary, and the subsidiary must not be a ‘tax exempt portfolio investment company’.

Another good example is Singaporean fiscal policy of taxation of incoming dividends. Singapore operates both exemption and credit methods under the DTA regimes and solely credit method where there is no DTA signed. Depending on the terms of DTA dividends may be exempted from the corporate tax. Alternatively the full value of the tax paid in other jurisdiction (including withholding tax on dividends) is credited against Singaporean corporate tax which is assessed on the whole foreign profit. If the foreign tax credit exceeds Singapore corporate tax rate no further tax is levied. If no DTA signed between Singapore and dividends remitting jurisdiction tax credit is allowed for dividends incoming from the subsidiary where the parent company holds 25% of shares.

c) If the beneficiary is domiciled in different jurisdiction than the holding jurisdiction it is of the essence that the ongoing dividends are subject to low tax rate. As it has been seen above under the EU parent/subsidiary directive no taxes will be levied in the dividends flow within the EU jurisdictions. Another option is to choose a jurisdiction with an extensive network of DTAs or even a jurisdiction with one-tier tax system such as Singapore. One-tier tax system means that taxes are paid only once and on the company level, i.e. no withholding taxes are levied on the outgoing dividends.

The Netherlands and Singapore are the jurisdictions which satisfy the aforesaid criteria. Moreover there are no capital gain taxes in both jurisdictions. Holding companies of these jurisdictions are considered as the most respectable ones due to sustained law, developed financial system and economic stability. By cause of the geographic location Dutch companies are more frequently used for investments in Europe while Singaporean in Asia. Nonetheless, both of these jurisdictions are applicable for use in almost any part of the world.