Minimizing Tax Using an Offshore Holding Company

The term holding company is usually used to describe a company which is set up (not to own/operate a business but to) passively hold an asset eg the shares of another company or a piece of real property.


Usually all a holding company does is receive passive income eg dividends if it owns shares in other companies or rent eg if it owns real property. The advantage of setting up a Holding Company “Offshore” is, if you incorporate it in the right place and structure it properly, (a) you might minimize Withholding taxes when dividends etc are paid to the Holding Company (see below) and (b) you can potentially receive (and reinvest) your passive income free from tax.


The other advantage of setting up a Holding Company “Offshore” is privacy. If you don’t want certain persons to know that you own a particular asset or assets you might choose to set up your holding company in a privacy haven ie somewhere which does not have a public register of directors or shareholders or beneficial owners.


A Holding Company is often placed between a Trading company and the Ultimate Holding Entity (which might be a Company or Trust or a Foundation) as a means by which to access a favorable DTAT (ie Double Taxation Avoidance Treaty – see below) such as would enable you to reduce the Withholding tax (“WHT”) that would otherwise apply on dividends, interest or royalties paid by a Trading Company to your Ultimate Holding Entity.


Commonly when dividends, interest or royalties are paid by a local company to a non-local (foreign) shareholder Withholding Tax (WHT) of around 20% is payable in the country from where the payments are being made.


However deals are often brokered between countries and written in to a DTAT which afford WHT discounts if the shareholder is a resident of, or incorporated in, a particular country.


For example Mauritius Companies are commonly used to hold shares in Indian Companies as Mauritius has a favourable DTAT with India that affords WHT discounts to Mauritius persons or companies.


Likewise Seychelles Holding Companies (CSLs) are commonly used to hold shares in Chinese Companies as China has a favourable DTAT with Seychelles that affords WHT discounts to Seychelles persons or companies.


The Netherlands is another popular place for the incorporation of Holding Companies as it has an extremely wide network of WHT friendly DTATs.



What is Withholding Tax (WHT)?

Withholding tax (“WHT”) is tax levied:

(a)   When a company incorporated in one country pays dividends to a shareholder of that Company who is resident in a 2nd country

(b)   When interest is paid by a company incorporated in one country to a lender resident in a 2nd country

(c)    When a royalty is paid by a company incorporated in one country to a party resident in a 2nd country


The applicable rate of WHT is usually somewhere between 15 and 25%.


The rate of WHT applicable may be reduced if the person (or entity) receiving the interest/dividend/royalty payment is tax resident in a country which has a favourable Double Taxation Avoidance Treaty (ie one allowing for a reduced WHT percentage) with the country from which the payment is coming.


What is a DTA?

A DTA (Double Taxation Avoidance Treaty) is a bilateral treaty (ie a legal agreement signed by two countries) which is designed to avoid persons being taxed twice ie in 2 countries on the same income. DTA’s usually also set out the taxing rights of each country where there would otherwise be a dispute about who has the taxing rights over certain income/gains.


DTAs tend to reduce taxes of one treaty country for residents of the other treaty country in order to reduce double taxation of the same income. The provisions and goals vary highly; very few tax treaties are alike. Most treaties:


  • Define which taxes are covered and who is a resident and eligible for benefits
  • Reduce the amounts of tax withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country
  • Limit tax of one country on business income of a resident of the other country to that income from a permanent establishment in the first country
  • Define circumstances in which income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension, and other income
  • Provide for exemption of certain types of organizations or individuals; &
  • Provide procedural frameworks for enforcement and dispute resolution.


In summary, if you are looking to buy or otherwise acquire shares in a foreign Company (before committing to the purchase) it would be wise to engage an International Tax/Corporate Structuring Specialist to provide advice on whether a Holding Company regime might be available to facilitate savings on Withholding Tax.



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