Taxes related to holding companies
Legally, it’s quite rare that the laws applied to holding companies differ from the laws applied to other companies under the same jurisdiction.
The difference between an ordinary company and a holding company most often exists in the tax laws that offer fiscal advantages to holding companies regarding revenues coming from its subsidiaries (dividends, capital gain etc.).
Legal and tax structures that organise international tax optimisation almost always use one or more holding companies to take advantage of tax treaties (listed below). This is a case of tax planning. There is a difference between tax planning and “treaty shopping” – a practice that most countries try to circumvent. It’s often difficult for the authorities to question such a scheme except in cases when the only justification for its creation lies in the area of taxes and has no economic justification whatsoever. The intertwining of various laws makes this exercise a particularly tough one for the authorities.
Within the EU, setting up a holding company becomes even more interesting because of the European legislation passed in 1990 and 2003 that cancelled tax deduction at source in connection with the distribution of dividends between parent company and subsidiaries.
Within the European “mother-daughter” regulations, a parent company with headquarters in the EU and with a subsidiary also based in the EU will have the dividends paid by a subsidiary to its parent company without tax deduction at source for the parent company.
A holding company with headquarters in the EU can benefit from these regulations if the following conditions are fulfilled:
- The holding company and its subsidiary have to be subject to company tax in their country
- The parent holding company has to be a direct owner of 5% of the capital of the subsidiary for at least two years, or has to commit to keeping the stake in its subsidiary amounting to at least 5% for two years
- The holding company has to have headquarters in an E.U. member state
Holding companies subject to company tax also benefit from bilateral tax treaties.
The items to consider are mainly the ones related to the type(s) of business the client plans to run.
For your information, please find below the main taxes and relevant elements to consider:
Taxes on corporate income and gains
- Corporate income tax rate
- Capital gain tax rate
- Branch tax rate
- Withholding tax rate
- Taxes on the dividends
- Taxes on the interest
- Taxes on royalties
- Branch remittance tax
- Net operating losses (carryback, carryforward)
- Special optional tax rates
- Conversion of debt into equities
- Participation exemption
- Foreign tax relief
- Determination of trading income
- Transfer pricing
- Investment tax credit
- Group of companies’ tax system
- Foreign-exchange controls
- Debt-to-equity rules
- Antiavoidance legislation
- Tax treaties signed and tax rates agreed
- Offshore companies
- Mergers and liquidations
- Transfer of company seat