Holding companies are a very important component to a well structured global business. Holding companies own assets, often in the form of shares in operating and non-operating companies. The choice jurisdiction of the holding company is crucial to protect assets, mitigate risks, consolidate business divisions, accumulate capital and shareholder value, receive dividends from operating companies and distribute profits to shareholders. When comparing different jurisdictions, take into account the benefits of a particular country’s Double Tax Conventions (Treaties), this will reduce the incidence of foreign withholding tax.
Optimally, the company should be formed in a jurisdiction that allows receipt of foreign sourced dividends at a low or rates of withholding tax, and ensures those dividends are not highly taxed in the holding company’s country of residence. Assess whether the country permits distribution of available profits to non-resident shareholders at low or preferably zero rates of withholding tax. Consider capital gains tax treatment from the disposal of shares in foreign companies held, is there an exemption on realized gains? Malta has been gaining in popularity as a solid choice for a holding company. Its tax system, adoption of EU Directives and extensive Treaty network provide a good option when planning your global structure. The following is a brief summary of what Malta offers:
The Corporate Income Tax rate is 35%, but can be reduced to between 0% and 10%. A foreign tax credit paid or deemed to have been paid can be credited against local tax due on foreign income. Dividends are subject to 35% tax, however, if the receiving company qualifies for the participation exemption, the tax drops to zero. There are a number of ways to qualify for a participation exemption, including, ownership of at least 10% of the equity of the company which allows the same percentage the right to vote, participate in distribution of profits and on liquidation. To maintain the participation exemption take care not to contravene the anti-abuse provisions (discussed in an earlier Post). There is no withholding tax on interest or royalties, unless the company has a permanent establishment and conducts business in Malta. Profits distributed to non-resident shareholders are not subject to withholding taxes, regardless of which jurisdiction the shareholders reside, including to offshore jurisdictions. Capital gains from the divestiture of shares in foreign companies benefit from a zero tax rate, irrespective of the holding period or shareholder percentage, and there is no capital gains tax on the liquidation of the holding company itself.
Carefully evaluate your business to determine which benefits will create the most efficient outcome. Examine a number of different jurisdictions and enquire as to the availability of investment or tax incentives (discussed in an earlier Post). Then choose the most efficient holding company for your global business.