With a holding company, a business can have a greater level of control in its financial flexibility and debt-structuring strategies. Holding structures may also be competent enough to leverage intra-group financing approaches through loaning retained earnings to its subsidiaries, which can further offer a greater extent of protection to profits as well as many tax planning benefits.
Tax planning undoubtedly is one of the significant benefits of employing a holding and operating subsidiaries structure. Along with intra-group financing policies, if accurately framed and the commercial element is in place, one could control business relationships among operating entities to achieve an added tax-efficient situation.
However, the business should be cautious with group structures, and provisions should be in place only to generate a tax benefit as they could be considered as pure tax avoidance schemes and be marginalized.
Many of the countries are embracing Country-By-Country(CbC) reporting as well as local and master file transfer pricing documentation by which large multinational group consolidated financials must be released to local tax authorities and shared amongst jurisdictions.
By sticking to a holding structure, the business might be able to evade personal taxes, capital gain taxes, withholding taxes on dividends, interests, and royalties. It might also utilize retained earnings for future investments in a tax-optimized fashion as few jurisdictions allow for expedient tax regimes and participation exemptions for asset holding structures.
Still, the business should be cautious at existing double-taxation agreements and controlled foreign company rules (CFC), among other legal and tax provisions.
How Does Holding Company Help in International Tax Planning?
Although holding companies are typically more mobile than their subsidiary foils because most of their balance sheet is constructed of intangible assets, and their undertakings may be primarily financially related, which may not be affiliated to a specific jurisdiction. And thus, one could ponder a variety of structuring options open worldwide.
Furthermore, this mobile structure allows a beneficial international structuring and tax planning strategy.
Tax laws differ significantly across jurisdictions, and corporate tax rates can go from 0% to 40% as some countries don’t impose withholding taxes, or only to payments to non-residents. Some allow partial or full tax credits for foreign tax paid, and other states don’t let tax dividends received or contribution exemptions.
Several jurisdictions put on the ‘full imputation system’ where profits are merely taxed once from the operating company that has primarily generated these profits.
When launching a holding company, the business should consider the jurisdiction where dividends received are excused from taxes or subject to reduced rates, utilizing full exemption from taxes or a participation exemption on condition that the holding owns a substantial percentage of the subsidiary. The accessibility of these exemptions could also be influenced by the location of the subsidiary like if the holding of subsidiaries is located in offshore jurisdictions may not provide license for exemptions or may be subject to restricted foreign company rules.
Regarding the location of the subsidiaries, the business could look at whether it is subject to withholding taxes at the source or if there is a double taxation agreement(DTA) between the jurisdictions that exempted or cut these taxes. Besides, the business should also study the location of the ultimate beneficial owners (UBO), if the jurisdiction of domicile of the holding charges withholding tax on the sharing of profits to residents of the country where the UBO is tax resident.
Moreover, some jurisdictions use ‘controlled foreign company’ rules (CFC), where undistributed profits from the subsidiaries may be taxed at the holding level. Although, CFC rules fluctuate across jurisdictions that some only apply to subsidiaries’ investment income, to subsidiaries without economic activity or physical presence in its country of domicile, and to subsidiaries integrated into specific jurisdictions, which may also be subject to the percentage of.
In several jurisdictions, exit taxes may also apply to subsidiaries that are reassigning assets to a member company that is accommodated in another jurisdiction.
Historically, tax planning strategies have been put in place, for example, using ‘intermediate’ holding companies to acquire tax settlements and condense the whole group tax liability when distributing profits to the ultimate parent entity (UPE). Bur the business should be vigilant with these artificial structures as they may be deliberated by certain tax authorities to have the sole purpose of creating a tax advantage and may go unnoticed due to anti-abuse rules.
Most jurisdictions have endorsed laws to avert and reprimand the practices that are known as ‘treaty shopping.’
Optimized tax structures may only be functional if there is economic and commercial substance are disclosed to tax authorities. Most jurisdictions are escalating the reporting requirements for multinational groups in line with OECD’s Base Erosion and Profit Shifting (BEPS) Action 13 and exchange of information among jurisdictions under the Multilateral Competent Authorities Agreement (MCAA).
Also, large multinational holdings that are vital parent entities(UPE) may need to file Country-by-Country Reports (CbCR), which deliver tax authorities information about revenue, tax paid and accrued, employment, capital, retained earnings, tangible assets, and business activities, among others from the whole group.
There are certain limitations and key aspects the business should review when setting up and operating a holding structure. Cross-border corporate structuring can be composite, expert advice accustomed to the specific business activity, situation, and circumstances, is always essential. When planning and administering tax structuring strategies, the business should confirm that everything is indisputable and transparent to tax authorities.
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