A corporate structure for a multi-national organisation should address the following:
- Consideration needs to be given to the resources of the Group and where these are physically located. The Group's ability to do business should not be hampered by tax planning.
- The structure should be one that minimises the tax burden on the Group. Consideration needs to be given to all taxes, including local corporation taxes, capital gains tax, withholding taxes and VAT and other duties.
- Where the Group has valuable assets, the structure should be one that protects those assets.
- The Group should be set up in such a way so as to assist it in raising finance. Venture capitalists may prefer onshore holding companies and in other cases, significant overseas shareholdings can restrict the ability of local companies to borrow money.
The location of a holding company is an important consideration in any international structure where there is a desire to minimise the tax charged on income and gains. Ideally the company should be resident in a jurisdiction which:
- Enables the extraction of foreign sourced dividends at mitigated rates of foreign withholding tax.
- Where the receipt of foreign dividends are taxed at low or zero rates of domestic corporation tax in the country of residence of the holding company.
- Permits the distribution of available profits to non-resident shareholders at low or zero rates of withholding tax.
- Allows for the realisation of capital gains from the disposal of shares in foreign companies at low or zero rates of both foreign and domestic corporation tax on the gains.
Foreign Withholding Tax
Most countries impose a withholding tax on dividends distributed by a resident company to non-resident shareholders. These withholding taxes can be as high as 35%. Through Double Tax Conventions, many countries have reduced or even eliminated the incidence of withholding tax on international dividend distributions. In choosing a holding company jurisdiction, one needs to take into account the benefits of a particular country's Double Tax Conventions in reducing the incidence of withholding tax.
High tax jurisdictions generally do not enter into Double Tax Conventions with offshore jurisdictions. For this reason, if offshore companies are used to own shares in high tax jurisdictions it is likely to increase the burden of tax, rather than reduce it.
Taxation of Foreign Dividends
Not only should you plan to have a holding company in a jurisdiction which can receive foreign dividends with reduced withholding taxes, one also needs to ensure that those dividends are not highly taxed in the country of residence of the holding company.
Many countries have legislation that exempts from domestic taxation all or a significant portion of such foreign sourced dividends.
Local Withholding Tax
Care needs to be taken that the jurisdiction chosen for a holding company is not one that will impose excessive withholding taxes on distributions of income to the shareholders of the company.
Capital Gains Tax Exemption
All leading holding company jurisdictions provide for an exemption from taxation on holding companies realised gains, from the disposal of shares in foreign companies. Conditions are normally attached to such exemptions and therefore legislation needs careful scrutiny to ensure that it is appropriate for the particular situation.
It is very rare for a single jurisdiction to offer all of the above attributes and therefore careful structuring often needs to take place to ensure that the holding structure is as tax efficient as possible. Dixcart can advise on the various advantages and disadvantages of different jurisdictions and can propose solutions to particular problems. This includes providing independent management of companies in the United Kingdom, Malta and Portugal.
At Dixcart we do not confine our advice to the taxation aspects of a particular problem.
Care is taken to ensure that the assets of a company are protected whilst at the same time ensuring the income from those assets is also optimised.
Protection of assets is not confined to the insurance of those assets, it also extends to ensuring that assets are held in the correct entity within a Group.
In considering a corporate structure we will speak with clients to identify major assets such as real estate and intellectual property.
We would normally try to hold such assets in companies that are not exposed to risk so that if a claim arises as a result of, for example, a trading transaction that could put the company at risk, at least the main assets of the Group are held within a separate legal entity.
With regard to intellectual property, thought will also be given to its protection by advising on:
- The registration of patents
- Ensuring that development agreements are in place so the ownership of intellectual property is not in question
- Licensing agreements to cover the use of that intellectual property by others
It is important to ensure that intellectual property is held in the correct place. The country of incorporation of the holder of the intellectual property can also have an effect on the withholding taxes payable on royalties received from companies abroad and the ease with which rights can be enforced with regard to the intellectual property.
Dixcart is often able to assist in raising finance and, when necessary, undertake for assets to be surveyed or due diligence to be carried out.
We can arrange for local agents or directors to be appointed to represent the client's interest in the assets where the client is unable to do so. Where the clients manage the assets themselves, we can ensure they have access to comprehensive local expertise to supplement their knowledge.
Consideration will also be given to the clients' future capital raising strategies before choosing the jurisdiction for the incorporation of a holding company or asset holding company.
If a company holds an asset which it intends to borrow against, care must be taken that the company is established in a jurisdiction where there is a register of charges as this can make borrowing easier.
If there is an intention to float the company on a stock exchange in the future, thought should also be given as to whether the jurisdiction in which the company is incorporated, managed and controlled will have a significant effect on the valuation that the market will place on the company.
In giving advice on corporate structures, Dixcart does not take a one dimensional view of the problem, confining themselves to tax issues but will look at wider client objectives to ensure that the final structure is not only tax efficient, but serves the client's known needs at the time of planning.