A holding company is an ideal structure for international businesses seeking international expansion. Most worldwide entrepreneurs favor this structure for better tax treatment and asset protection.
However, it’s more about choosing the right place to set up your holding company. Some jurisdictions have tax treaties that enable this kind of flexibility.
In this article, BBCIncorp helps you gain insights into the popular uses of an offshore holding company. And by relation, where you should consider when choosing this type.
1. Offshore holding company structure: How can it be used?
Simply put, a holding company does not engage in any trading activities but is established to hold shares or assets of other companies. Assets here can be financial instruments (e.g. stocks), intellectual properties, or real estate.
By extension, it’s also for holding intellectual properties, real estate, and many other instruments. The holding company would then receive passive income through such investment holdings. Examples of passive income of the holding structure are:
- Dividends, interests, and capital gains from stocks, bonds, and other financial instruments
- Rent from holding real estates
- Royalties from holding intellectual properties
1.1. Why should you incorporate your holding company offshore?
An offshore company has various uses such as reducing withholding tax, increasing asset protection, and enhancing privacy. Incorporating your holding structure as an offshore company can further enhance its efficacy.
If properly structured, an offshore holding company can provide its subsidiaries with proper corporate tax optimization, enhanced liability protection, and more. Here are several perks you can look forward to when setting up an offshore holding company:
- Separate liability. In the event that the subsidiary is at the receiving end of litigation, the parent company is not responsible.
- Financial segregation. Losses incurred from the child companies are detached from the parent company.
1.2. What are the popular corporate structures an offshore holding company usually takes?
An offshore holding structure is set up under the following forms:
- International business company (IBC). As an IBC, the offshore holding company can partake in international trading or financial investments.
- Limited liability company (LLC). LLC setups are more straightforward and simpler than corporations. An LLC can help protect personal assets and is legally independent of its owners.
- Trust or Foundation. These entity types are effective for succession planning and even asset protection. Both a Trust and a Foundation is constructed based on different law systems. By order, they are the civil law system and the common law system, respectively. You can get more information about offshore trust here.
You might also be interested in other types of holding structures such as: Seychelles Special License Company (CSL), BVI Segregated Portfolio Company, Belize Protected Cell Company, etc.
2. What are advantages of offshore holding company?
There are many benefits for offshore holding structuring options. Below are some of the most highlights that you must know:
2.1. Tax exemption
A big part of an offshore holding company’s identity is its helpful tax breaks. Below are some fictive scenarios on how offshore holding can help maximize your revenue streams.
2.1.1. Dividends and interest
Many offshore jurisdictions offer tax incentives for foreign investors with asset holding structures. You can cut a considerable amount of tax liabilities on various revenue sources.
For instance, Belize has a territorial tax system that only targets income sourced domestically. By incorporating a holding structure here, your foreign-sourced income will not get taxed!
Now it’s just a matter of finding jurisdictions that have Double Tax Treaties (DTA) with your own. Set up your subsidiaries (B) there and you’ve got yourself a prime tax reduction line-up! Any dividends and interests payouts made by the subsidiary will get a reduced withholding tax treatment.
Since Belize doesn’t levy withholding taxes, your foreign-sourced income is in the clear. So, the offshore holding company in such cases actually pays no tax.
The tax benefit also applies to royalties paid to intellectual holding companies. If we apply the same principle, the outcome stays the same.
Set up your IP holding company in a jurisdiction that imposes no withholding tax. License your IP to a company in any country that has the same tax incentive or at least a mitigation of it.
2.2. Easy transfer of property ownership
The flexibility of a holding company is also shown in ease of ownership transference.
The worth-mentioning fact is that such transfers can be precluded from stamp duty and inheritance tax. In the case of transferring underlying properties owned by an offshore holding company to heirs, there would be no inheritance tax applied.
Moreover, associated payments during transactions like stamp duty or similar legal charges of an overseas holding company may not exist.
Generally, overseas holding companies allow business owners to maximize their profits in an efficient manner when it comes to the transfer of ownership property.
2.3. Enhanced privacy
With regard to confidentiality, setting up an offshore company for holding structure is a good idea. By choosing an appropriate type of business, your company can gain another layer of protection for the company’s information.
Several offshore countries set out strict regulations on guaranteed privacy of the company ownership. Personal data are not allowed to be publicly disclosed unless there’s a legal request from the government. This, therefore, can enable a high level of privacy to offshore companies for holding real estate.
Recommended holding offshore structures for those concerned with these advantages is forming a trust or foundation. Some investors even expect better privacy, and for such cases, they can consider using nominee shareholder or director services. By acting on behalf of the beneficial owners, names of those appointed directors or shareholders would be present in the holding company’s papers instead of owners’.
2.4. Other benefits
Establishing an offshore company for investment holding purposes brings you a more efficient tax position through a tax restructuring. In addition, the international holding company can also act as a powerful tool for asset protection. This is achieved by separating legal and financial liabilities through each child company.
To be specific, each individual subsidiary of the offshore holding company is separated and has limited liability. It would not have the responsibility to take on any other subsidiary’s debts or liabilities if no solid proof for the illegal transfer of assets from the said subsidiary is found.
3. Best offshore jurisdiction for a holding company
Forming an offshore company for holding purposes brings business owners tons of advantages. Note, however, that requirements for holding companies may be varied depending upon each country. It is necessary to take careful consideration of where you should incorporate your desired holding company.
In addition to tax treatment, there are certain parameters that should be taken into account when determining your ideal location. Typically, two crucial factors that are highly recommended for your consideration include:
- Flexibility of the country’s regulatory framework; and
- Whether it is a country with double taxation
Below are some popular offshore countries for foreign investors to establish an offshore holding structure:
- The British Virgin Islands
- The Netherlands
- Hong Kong
You may gain better insight into these options by reading our blog: Top 6 best offshore company jurisdictions for foreigners
Singapore and Hong Kong are popular choices for holding structures because of many good benefits. Both are well-known for their reputed and friendly business legislation, attractive tax regime, and outstandingly numerous tax treaties available.
Singapore does not levy dividends earned from resident subsidiaries at the holding level. There is also no withholding tax in respect of dividends distributed to residents or foreigners.
Likewise, Hong Kong is another worth considering a location for those seeking holding company formation in Asia. Hong Kong has signed DTAs with many European countries and many other worldwide jurisdictions.
This enables subsidiary companies from such partnering countries to enjoy withholding tax reduction or exemption when shifting dividends or interests to Hong Kong holding companies.
Want to know more about doing business in Hong Kong? Visit our blog Doing Business In Hong Kong: The Ultimate Guide For Foreigners for more details.
This does not often happen in a low-tax jurisdiction, but Cyprus is among the stand-out offshore jurisdictions with a large network of double tax treaties (over 50 DTAs in place). Mauritius with about 30 DTAs is also widely used for shares holding company setup, especially for Indian companies.
Still, note that certain used-to-be-tax-free jurisdictions namely the BVI, Cayman Islands, Jersey, or low-tax countries like Mauritius are now applying economic substance requirements on holding companies. This is a matter of concern.
Depending on each specific case, there can be reduced substance requirements or certain compliance duties required on the holding company, please engage your legal expert before moving.
Quick guides to ES Rules in particular countries Belize and BVI
- Belize Economic Substance Requirements & Tax Guide
- 2022 Update: A Guide to BVI Economic Substance Requirements
4. Some issues that you need to take heed of when establishing an offshore holding company
The story of establishing an offshore holding company is not merely about how your company can reap tax benefits on capital gains, dividends, royalties, or interests. Network of double tax treaties available between the country where your holding entity is established and the country where your subsidiary company is located, is the primary factor, but still not enough.
A secondary level of consideration should be taken into account. Tax residency test and certain anti-avoidance international rules are worth mentioning issues. When it comes to the cross-border corporate structure, the fact foreign owners are well versed in anti-abuse regulations would never be useless. Particularly, you should pay attention to transfer pricing regime, hindrance of interest deduction, controlled foreign company (CFC) rules, or recently hot issue – economic substance requirements, in certain offshore destinations.
If the setup is not in a proper manner, transactions between related entities of the holding group can be determined as non-arm’s length transactions. Further tax adjustments may be required therefrom, and more reporting tasks may be requested from competent authorities. Along with transfer pricing documentation such as master and local files, the holding company can also be the qualifying entity subject to Country-by-Country (CbC) reporting. In Hong Kong, for example, 6.8 billion HKD would be the threshold volume to consider whether a Hong Kong ultimate parent entity of your multinational group needs to comply with CbC requirements. To gain better insights on Hong Kong transfer pricing regime, you can read here.
In some jurisdictions where you consider, tax residency test can be another important issue. Holding companies with foreign ownership in Singapore can be required to obtain a Certificate of Residence from the Inland Revenue Authority of Singapore (IRAS). The purpose of this application is to prove their tax residency in Singapore which will allow them to legally enjoy the tax advantages from signed DTAs between Singapore and other overseas tax authorities in arrangement.
4.1. Economic Substance
Importantly, you should not disregard the presence of the economic substance (ES) rules in many offshore countries. In an effort to put in place ways to curb tax evasion, “treaty shopping’’ and other illegal practices for offshore structure benefits, ES regimes are now widely implemented in most offshore jurisdictions.
The key to mention is that holding business is one of the prescribed relevant activities to be under consideration of the economic substance test. Pure equity holding companies might enjoy reduced substance requirements. But whatever the case may be, it is relatively necessary for the offshore company to be well prepared for appropriate economic substance when structuring its holding structure.
4.2. FATCA and FBAR
The International Account Tax Compliance Act (FACTA) compels US citizens to report their foreign financial accounts and assets to the Internal Revenue Service (IRS). Second, FATCA requires foreign financial institutions to comply with certain standards (also some non-financial organizations).
In short, this cross-collaborative effort aims to combat tax evasion and other harmful tax practices from offshore accounts specifically belonging to U.S citizens. In conjunction with this regulation is the Foreign Bank and Financial Accounts Reporting (FBAR) which is to verify the legitimacy of your offshore earnings.
If you want to find out more on the compliance requirements of either regulation, visit the following blog posts:
5. The bottom line
To sum up, establishing an offshore holding company can bring you various benefits. However, it is important to take a careful examination of certain factors to consider before reaching your final decision which is the offshore company registration. At BBCIncorp, we have a dedicated support team to give you the best advice on which corporate structure is ideal for your specific needs.
Feel free to send us an email if you have any questions concerning offshore holding structure.