What is a Holding Company and How Are Holding Companies Used?

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 minimise 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 a Trust or a Foundation) as a means by which to access a favourable DTAT (ie Double Taxation Avoidance Treaty) 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 an onshore company to an offshore shareholder Witholding 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.


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