When discussing holding companies, I guess the key question is do you need one?
Before we even begin to answer this question, let us first understand what a holding company is.
A holding company is a company that allows you to move assets, profits, losses, and capital gains between members of a corporate group. We could argue that, essentially, the purpose of a holding company is to make commerce easier.
Most European Economic Area (EEA) countries offer similar treatment to members of group companies. Profits can be exited from subsidiaries to the holding company without withholding tax (WHT) and if there is WHT, there is a wide network of international double tax agreements that provide relief through tax credits or deductions.
In the absence of deferred tax assets (DTA’s), there are also unilateral tax reliefs, which exempt such distributions from tax. Countries, which have DTA’s usually, adopt one of three model conventions, the OECD, U.S. or UN convention. The general rule, is that the country in which the taxpayer or company reside are the ones that provide tax relief. Residence, therefore, plays an important role. We will discuss this later.
So, back to our first question, do you need a holding company? The short answer is yes. It is a good idea, especially if you are working in different jurisdictions through special purpose vehicles rather than through permanent establishments or branches, which can be administratively complicated.
Now that we have answered the question of whether a holding company is needed, our next point of consideration will be location, where should your holding company be based?
International tax is quite broad; it is ever-changing and sometimes complicated and has its fair share of anti-avoidance legislation. The choice of location depends on several factors, such as commercial, financial, legislative and tax. And so, the UK, Ireland and the Netherlands (Dutch) are good options, however, that isn’t to say that there aren’t other places to consider.
I will now attempt to introduce the importance of residency, choosing a jurisdiction and some of the specific reliefs that UK has to offer although you will find similar benefits from fellow EEA countries.
UK resident companies are taxed on their worldwide income. A company is thought to reside in the UK if it’s incorporated in the UK or it is controlled and managed (C&M) in the UK. C&M relates to the place where board decisions are made. An exemption from UK tax is available for the profit of foreign permanent establishments of UK resident companies.
Factors which determine if the C&M is offshore are the place of activities of the non-resident chairman, residency of working directors, quorum and regular quarterly meetings.
There are several ways to relocate a company. For example, relocation can be achieved by setting up a holding company (inversion) and moving headquarters (shifting central control and management). In addition to, the use of intellectual property (IP) holding companies for asset protection and generating income, through offshoring support functions to achieve cost savings or, through use of agent or franchise arrangements.
As an example, Malta is used for offshoring back office or customer support functions as it has low costs. Similarly, Luxembourg is good for treasury operations. Research, manufacturing and sales operations can be centralised in cost and tax efficient locations.
Why not consider franchising or licencing (permission to use a product or process, which is narrower than franchising but is also a form of licensing) as an alternative to opening further sites? Or, consider changing the risk model by restructuring the group and separating the activities of sales, buying, stock holding collections, IP and R&D. Belgium is good for holding IP as low tax on IP income and gain whilst UK and Ireland give enhanced expenditure and credits.
A business can be viewed as a collection of component activities with their own characteristics all working together. For example,
- Management services usually sit in the holding company; consider Ireland, UK, Belgium, Luxembourg or Switzerland. All have good legal structures and a wide favourable treaty network for receiving dividends, royalties and interest.
- Central operations interact with all the components and will hold the intangibles. Belgium, Hong Kong, Ireland, Luxembourg, Netherlands and Singapore are used as places to locate central operations because of their good commercial regimes and expert labour force.
- Research and development centres will benefit from staff and investment incentives so, take a look at France and the UK.
- Shared services e.g. call centres located in low cost regions, Malta, Cyprus or India. Sales and distribution are driven by customer location.
- If it is difficult to relocate, consider commissionaire (undisclosed agent) or limited risk distributors (LRD).
- Contract manufacturing operations are located in low cost base counties, Eastern Europe or North Africa. For effective tax planning around IP, you should be able to demonstrate the existence of infrastructure and human resources in that location.
In the UK, there are concepts of 51% and 75% groups. In 51% groups, the profit levels are divided by the total number of companies in the group when deciding if companies have to pay corporation tax quarterly rather than annually. For relieving trading losses, we must have 75% at each level and at the parent company. For chargeable gains, we require 75% at each level and effective interest of 50% at the parent level. Capital losses cannot be group relieved therefore; one should consider transferring assets with potential capital gains to those companies where there are potential capital losses. Overseas resident companies are included within the capital gains group; however, assets can only be transferred with no gain or loss between companies resident in UK or foreign resident companies with permanent establishment in the UK.
Gain from the sale out of a substantial holding (not sale of a substantial share) is exempt but capital loss relief is denied. This relief is known as substantial shareholding exemption (SSE). The vendor company can be a holding company of a trading group and must have owned at least 10% for a period of 12 months in the 2 years prior to the sale. A trade from one old group company can be transferred to a new group company prior to that new company being sold. If a company that is being sold out of the group has acquired an asset within six years prior to that company’s sale, there will be a de-grouping charge. The effect is to add the gain at the time of the transfer to the consideration received by the selling company. Any gain or loss on this asset will be irrelevant if SSE is being claimed. The de-grouping charge can be avoided by transferring the asset to a fellow company before selling the company. The asset can then be rented across. The other option is to sell the self-contained group, i.e. the company that is selling its subsidiary and the subsidiary are sold out together, and effectively the asset stays within the company.
A target company joining the group may have pre-entry capital losses carried forward. These losses can only be used by the target company to offset against any asset it has at the time of joining the group or any assets it acquires from a non-group company for use in its own trade.
Companies which have their main place of business in the UK and not just a “brass plate” on a registered office can form a single VAT group, such that one company or one individual controls or several individuals in partnership control (has at least 51%) all of them. The controlling person does not have to be in the UK. The benefits of a VAT group are that there is no VAT on intragroup supplies, which also means that exempt intra group supplies are ignored.
If you’re thinking of creating a holding company, hold on!
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Article written by Haroon Rafique (Principal, Meer & Co Chartered Accountants and Tax Consultants)
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