Holding solutions: How to optimise taxation through a holding structure

Structuring a holding company is one of the most challenging tasks for tax advisors and businesses, because there are so many factors to consider in terms of taxation, residence and optimisation. The simple fact that a holding regime exists in a given country will not make the whole structure work. Here are the key aspects to consider when choosing a holding jurisdiction:

Income tax. In favourable holding jurisdictions, income derived from qualifying participations (i.e. dividends and capital gains) will ideally be fully exempt from corporate income tax. In many holding countries, full tax exemption is possible under specific participation exemption rules established by local legislation.
Outbound distribution of dividends. Dividends paid by a holding company to its parent company may be exempt from withholding tax under certain conditions. The final withholding tax rate may vary, depending on the residence status of the beneficial owner.
Double taxation treaties and the EC Parent-Subsidiary Directive. Tax treaties are aimed at reducing withholding tax rates on inbound and outbound dividends. Therefore, the most appropriate holding jurisdiction depends on the respective locations of the parent company and the subsidiary.
Tax residence status. Achieving tax residence status can be crucial for utilising the benefits of a holding company. Obtaining a tax residence certificate can be challenging but may be possible under certain conditions, such as having a resident director, a local rented office, local employees and others. Other obligations, like annual financial accounts, statutory accounts and tax returns, must be complied with at all times.
Substance. Very often there are substance requirements, with some countries stipulating a certain amount of substance in the holding jurisdiction before tax benefits can be obtained (so-called anti-abuse legislation).

calculator, tax forms, money and pen on table

Cyprus and the Netherlands are well known for their favourable tax regimes for holding companies. Contact Confidus now to incorporate a holding structure.

Cyprus

Cyprus is one of the jurisdictions most advantageous for holding companies.

Tax on incoming dividends

Dividends received by a Cyprus holding company from foreign subsidiaries are exempt from corporate income tax under the following conditions:

The foreign subsidiary does not account for more than 50% of all investment activity (in other words, has over 50% passive income);
The effective tax burden of the subsidiary is greater than 5%.

If either of these conditions is not met, then dividends received from a foreign company by a Cyprus holding company are taxed at a rate of 17% under the Cyprus Special Contribution for Defence Law (SCDL). However, as you can see, Cyprus offers a very generous mechanism for participation exemption.

Tax on outgoing dividends

There is no withholding tax on dividends channelled to beneficiary companies or individuals, regardless of their residence status. In this respect, the existence of a double tax treaty is irrelevant.

The Netherlands

Netherlands is the other advantageous jurisdiction.

Tax on incoming dividends

In the Netherlands, a participation exemption applies to dividend income. In order to qualify, Dutch holding companies must meet the following conditions:

The Dutch holding company owns at least 5% of the subsidiary company’s interests.
The subsidiary pays standard corporate income tax in its home jurisdiction.
The investment is not considered to be a portfolio investment.

Dividend income covered by the participation exemption incurs no income tax in the Netherlands.

Tax on outgoing dividends

Dividends paid by a Dutch holding company to its parent company are generally subject to a withholding tax of 15%. However, this rate can be reduced; if the parent company is resident in the EU, then under the EC Parent-Subsidiary Directive no withholding tax is payable, as long as the beneficial owner meets certain criteria (the subsidiary has sufficient substance in its country of residence, and at least 50% of its ultimate shareholders are resident in the EU). If your company is located outside the EU, then you should check any relevant tax treaty, which may reduce the applicable withholding tax to 10%, 5% or even 0%.

Summary

Both Cyprus and the Netherlands offer opportunities for tax-free investment, especially when combined with onshore structures.

Holding structures may have additional benefits for tax optimisation in situations involving royalties, interest or financial activities.

Finding the best solution requires meticulous tax planning. Confidus will not only provide general information about holding structures, but will also assist in the decision-making process. Some situations will require alternative solutions, which we can easily investigate for you. Our common goal is to make your holding structure as beneficial as possible for your business.

Call us now for a free consultation — or to incorporate your holding company!