A guide to choosing the best home for your holding company

We have all heard of Alphabet in the news, often in conjunction with Google. Alphabet is essentially a holding company, and it is the parent company of Google. Apart from Google, Alphabet also has other subsidiaries like Waymo, Verily, Fitbit, and even YouTube.

But what is a holding company and what purpose does it serve?

Holding Company – What and Why?

A holding company is a business entity that does not essentially manufacture anything or provide services or conduct any operations itself but holds the controlling stock in other companies. These ‘other companies’ are subsidiaries that do the actual manufacturing, service-providing, and operating. All the holding company’s management does is oversee how the subsidiaries are run.

A holding company can be structured in various forms like an LLC, a partnership, a trust, or a foundation, with an LLC being the most favored.

Holding companies are formed for various reasons like:

1.?????Protection of assets and protection from liabilities –when a holding company holds assets, and an operating company performs poorly and becomes bankrupt, the assets are protected as the holding company and subsidiary are separate entities. The assets are protected from creditors and other liabilities that the subsidiary may sustain.

2.?????Growth, Development, and Innovation –The holding company can diversify its portfolio with greater ease, and enter and exit ventures easily. The holding-subsidiary structure also helps in setting up global credit limits, which would in turn provide accessible funding to the small subsidiaries.

3.?????Minimizing tax –based on where it is set up, there could be taxation benefits for the holding company-subsidiary company structure. A few places where holding companies can be set up are Singapore, Mauritius, Cayman Island, and Delaware.

Holding company in Singapore

The DBS group holdings is an example of a holding company that is based in Singapore.

Apart from having excellent economic stability, and superior infrastructure, Singapore provides a great many reasons to set up a holding company in its jurisdiction. Singaporean holding companies have no limits on the domicile status of their subsidiaries i.e the subsidiary companies can be based in any foreign country.

It especially favors setting up an Investment Holding Company since they generate income through the purchase of Real Estate Properties, rentals, or shares in other companies. Consequently, they enjoy many tax and expense deductions. Some of the benefits are:

1.?????Single-tier corporate tax system – This means corporate profits are taxed only once. Singapore does not collect any tax on dividends from a subsidiary to a parent (holding company) in Singapore. There is no withholding tax when dividends are distributed either (residents or non-residents).

Since Singapore has DTAAs with 80 countries, dividends, interests, and royalties paid to Singapore resident holdings from subsidiary companies in treaty countries are subject to a reduced rate or can be exempt from tax. These benefits are available only if the holding company is considered a tax resident.

2.?????No capital gains tax –There is no transfer tax on the sale of shares. So when a subsidiary is sold by a parent, it is not a taxable event at the holding company level or the subsidiary level. The exception is that if capital gains constitute the main income of the holding company, and if the holding period of the asset that is sold is short, then the gains will be treated as ordinary income and will be subject to income tax.

3.?????Tax incentives for IP holdings – The IP development incentive (IDI) offers concessionary tax rates of 5% or 10% to royalties and other IP income on the condition that there has been a certain level of expenditure, jobs created, and other economic commitments.

Singapore also has favorable accounting regulations, like the losses from one subsidiary can be used to offset the gains from another.

The registration cost is between $300 and $1,200 for foreigners. Annual company costs every subsequent year is around $600.

Holding company in Mauritius

Mauritius is an island nation in the Indian Ocean off the coast of East Africa. It ranks 13 in the World Bank’s Ease of Doing Business Report and is 1st among the African nations. It is a suitable place to set up a holding company if the goal is to enter Africa.

Mauritius has an adept banking system and no exchange controls system. It is very easy for executives to obtain residence permits for moving there. It has a good IT infrastructure and relatively good transport links to mainland Africa.

Some other tax benefits that Mauritius provides are:

1.?????It does not impose a capital gains tax or an inheritance tax.

2.?????There is no withholding tax on dividends leaving Mauritius

3.?????It has DTAAs with more than 40 countries

Mauritius has recently introduced quite a few taxes and regulatory changes like:

·????????New personal tax rate of 12.5% for an individual earning more than MUR700,000 and not exceeding MUR975,000.

·????????8-year income tax holiday to a newly set up developer investing at least MUR50 million and complying with OECD requirements.

·????????Holders of the Global Headquarters Administration license will be provided work and residence permits for 5 executives and the latter’s dependents.

·????????Increase of additional deduction from 10% to 25% to large manufacturers whose annual turnover exceeds MUR100 million, on the amount incurred to purchase locally manufactured products from a small enterprise.

·????????International arrangements possible for alternative dispute resolution for resolving cross-border tax disputes and implementing internationally agreed standards to prevent base erosion and profit shifting

The one very prominent disadvantage that Mauritius has is the high corporate rate when compared to other countries like Singapore or Dubai. Mauritius is also very slow when it comes to incorporating new companies.

The incorporation cost in year 1 comes around $2,800, and the maintenance cost every subsequent year is $2,700.

?Holding company in the Cayman Islands

The Cayman Islands is a British Overseas Territory in the western Caribbean Sea. It is one of those places that is synonymous with the word “tax-haven”. The reason it is considered a tax haven is that the residents do not owe any income tax, property tax, capital gains tax, withholding tax, or payroll tax. The reason it is popular in the business world is that it has no corporate tax.

The Cayman Islands provide excellent legal, financial, and professional environments. The Cayman Islands offshore company (exempted company) is the most popular type of business vehicle available. The benefits are:

1.?????It allows the company to do business outside the jurisdiction but has limitations when it comes to doing business with residents of the island itself.

2.?????As mentioned above, it is not subject to corporation tax, income tax, or capital gains tax, though a nominal fee of $854 is imposed annually on the company.

3.?????There is no requirement for the director to be local but the company must have a registered office in the Cayman Islands. The register of shareholders and minute books are not required to be held in the Cayman Islands and can be held in another jurisdiction.

4.?????There are no minimum capital requirements and shares may be with or without par value, issued at a premium over par value, in fractions of a share, preferred, deferred, or other special rights.

5.?????Transfer of shares is not subject to stamp duty unless the Exempted company holds property within the islands.

It is best used as a conduit for international investments.

The incorporation cost in year 1 comes around $5,500, and the maintenance cost every subsequent year is $750.

Holding company in UAE

UAE corporate law provides holding firms with rewarding opportunities for real estate ownership or retaining shares in other corporate bodies. Establishing a holding company in the UAE provides an array of advantages like –

1.?????Tax benefits- This easily the most popular reason. There is 0% tax on corporate profits, capital gains and dividends. There is no tax in income earned abroad.

2.?????Variety of ownership options – 100% foreign ownership is allowed in FreeZones

3.?????Accessibility of funds – a holding company can open a corporate bank account in the UAE and access funds from any part of the world using internet banking.

Choosing the right location, such as Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM) is important.

DFIC is a well-established centre for banks and other financial institution and is a strategic location for emerging markets.

ADGM has a favorable taxation system and a rich environment for legal and financial services with top-notch service.

The incorporation cost in year 1 comes around $7,000, and the maintenance cost every subsequent year is $1,550.

?Holding company in Delaware

A Delaware holding company allows you to do business in any part of the world while being taxed in Delaware.

It is especially attractive to financial companies because of its business-friendly usury laws and low taxation.

The advantages to having a Delaware holding company are:

1.?????Increased capital injection as some of the main stock markets of the world are in the US and it is the main place for venture capital and private financing.

2.?????Sales of products of US companies to other companies are easier than those by non-US companies.

3.?????Disclosure of details of officers and directors is not needed.

4.?????No sales tax regardless of whether the company has a physical location in Delaware or not.

5.?????No corporate tax on interest or other income arising from investments.

6.?????Compared to other states in the US, Delaware has very low franchise and LLC taxes.

However, not everything that glitters is gold. There are a few disadvantages as well. A thorough understanding of the tax laws is needed to get the maximum out of the tax benefits. Listing in non-US stock exchanges is complicated because of the structure of the holding company.

If you are looking at setting up a holding company for your business venture, use the valuable advice of a CFO consultancy service to help you make the right choice based on your needs. Factors like the structure of the holding-subsidiary, requirements to establish a holding company, details that are needed to be furnished to the respective authorities, tax advantages and disadvantages, etc need to be considered and looked through with a fine-toothed comb to decide on the ideal location for setting up the holding company.

Click here to know more about incorporating your company in Delaware.