Many Offshore nil tax jurisdictions now have prohibitive/extensive Economic Substance (“ES”) requirements in regards to Holding Companies and in particular IP Holding Companies requiring such Companies to show “Economic Substance” on the ground in that jurisdiction (eg staff and or an office and or income producing activities etc)
But what if you’re looking to set up a passive asset holding Company ie a Company that is being set up purely to hold your interests (eg as an investor) in another Company?
If you are looking to set up a pure equity Holding Company (ie to hold shares in another Company) where is the best nil tax “Offshore” jurisdiction in which to incorporate such a Company ie without having to meet prohibitive ES requirements.
This article considers the current options in that regard…
Panama for Holding Companies
Panama does not currently impose formal economic substance requirements on standard holding companies, nor does it tax foreign-sourced income.
Panama does not impose Economic Substance reqs.
All companies must maintain accounting records and supporting documentation, even if they do not earn Panama-source income.
By April 30 each year, the company must submit an annual accounting declaration through its Registered Agent. If the company has foreign-source income derived from operations conducted abroad, it must submit a copy of the accounting records as part of this declaration.
Failure to comply may result in fines and administrative penalties. I enclose a guide re accounting records.
To incorporate a Company in Panama with OCI usually costs $US1,500 and from 2nd year $890.For details of what’s included in the set-up price and annual fee from 2nd year, check these links:
For details in regards to the features and benefits of a Panama Company check this Link: https://www.dropbox.com/scl/fi/6v1lcouehe3fiemrp5xv8/PANAMA-COMPANIES-DETAILED-FACT-SHEET.pdf?rlkey=ydh1ehbl31o6cw52dmb1olunw&st=gzdngyto&dl=0
Samoa for Holding Companies
Samoa remains a suitable offshore financial centre for holding and managing IP, offering a flexible and confidential framework under its International Companies Act 1988.
1. Setup Requirements – Samoa International Company (IC):
To incorporate an international company in Samoa, we would require:
- Proposed company name (with a few alternatives in case of name conflict)
- Details of directors and shareholders (corporate or individual permitted)
- Beneficial ownership information (not publicly filed)
- Registered office and licensed trustee/agent in Samoa (which we provide)
- Standard or bespoke Constitution (we have a standard memo)
2. Ongoing Compliance Obligations:
- Annual government renewal fee
- Annual trustee/registered agent service fee
- Maintenance of company records at the registered office
- No requirement to file financial statements or returns with the Registrar
- No local tax on foreign-sourced income (tax exempt)
There is no public register of directors, shareholders, or beneficial owners, maintaining confidentiality.
3. Economic Substance Requirements:
As of now, Samoa does not impose Economic Substance requirements on international companies that are passive IP holding entities (e.g., where the company merely holds IP without commercial exploitation from Samoa).
However, if the Samoa IC actively exploits the IP (e.g., licenses IP and earns royalties), this may attract scrutiny under OECD BEPS standards. While Samoa is currently a “nil-tax” jurisdiction, the global trend is toward substance-based regulation, so we recommend:
- Ensuring operational activities (licensing, IP development, etc.) are conducted outside Samoa
- Clearly documenting the passive holding function of the Samoa IC
- Considering a trust structure if additional layers of protection or control are desired
To incorporate a Company in Samoa with OCI usually costs $US1,500 and from 2nd year $890.For details of what’s included in the set-up price and annual fee from 2nd year, check these links:
For details in regards to the features and benefits of a Samoa Company check this Link: https://www.dropbox.com/scl/fi/v7tztj8a1lkr9bvn60anz/Samoan-Companies-Page.pdf?rlkey=quov4wimgr7uqopq4lomuymnm&st=qv1otboe&dl=0
Hong Kong For Holding Companies
There are no restrictions for a HK company to hold shares of other entities.
Are there are any special compliance or ES requirements a Holding Company in HK will need to meet???
In terms of registration and ongoing renewal, there’s nothing special.
However, in terms of profits tax, the company being a multi-national enterprise structure (MNE) should check whether receiving foreign-sourced passive income (ie dividend income & disposal gain) can be exempted from HK profits tax under the Foreign Source Income Exemption (FSIE) regime.
Only income received in Hong Kong is subject to the FSIE regime. “Received” includes:
- Remittance into a Hong Kong bank account;
- Used to settle a Hong Kong business debt;
- Used to purchase movable property brought into Hong Kong.
Exemption Conditions for Dividend Income
To qualify for exemption from profits tax on foreign-sourced dividends, the Hong Kong company must meet one of the following:
1. Economic Substance Requirement (ESR)
- Applicable to non-IP income (e.g., dividends, interest, disposal gains).
The Hong Kong company must:
- Conduct substantial economic activities in Hong Kong.
- Have adequate number of qualified employees.
- Incur adequate operating expenditures in Hong Kong.
- Outsourcing is allowed if properly monitored.
For pure equity-holding companies, the ESR is less stringent—mainly requiring compliance with corporate law obligations and adequate oversight.
2. Participation Exemption
- Applies to dividends and share disposal gains.
Conditions:
- The HK company must be a Hong Kong tax resident or have a permanent establishment in Hong Kong.
- Must hold at least 5% equity in the investee company for at least 12 months.
- The investee must be subject to at least 15% corporate tax in its jurisdiction.
- Must pass anti-abuse rules:
- Main purpose test (not for tax avoidance)
For more information about FSIE, please refer to IRD website at: IRD : Foreign-sourced Income Exemption
To incorporate a Company in HK with OCI usually costs $US2,500 and from 2nd year $1,800.For details of what’s included in the set-up price and annual fee from 2nd year, check these links:
For details in regards to the features and benefits of a Hong Kong Company check these Links: https://www.dropbox.com/scl/fi/lux40de53b7hdtxycetir/Why-Incorporate-in-Hong-Kong.docx?rlkey=fwn22c1h0mwb5l1zgo03i1rge&st=0lpfdycz&dl=0
BVI for Holding Companies
There are no special requirements for a passive asset holding company to be set up in the BVI.
The company will fall under ES as pure equity, if it will only be holding shares. Substance for pure equity will need to be set up – the fee is $1350 per annum ie on top of the usual incorporation/annual renewal fee. If the company holds something else such as bonds it will not fall within scope as a pure equity.
Pure equity companies are only required to have a BVI Agent in the BVI if it is passive. If it is an active pure equity company, eg. buying, selling, etc substance will be required.
To incorporate a Company in the BVI with OCI usually costs $US1,250 and from 2nd year $1050.For details of what’s included in the set-up price and annual fee from 2nd year, check these links:
For details in regards to the features and benefits of a BVI Company check this Link: https://www.dropbox.com/scl/fi/6t1l4cefqfruzhij73kg8/BVI-IBC-FACT-SHEET-ECONOMIC-SUBSTANCE-GUIDANCE-NOTES-CURRENT.pdf?rlkey=jtwj4vxjs80q1ra2aab67z72l&st=pzi8u0ck&dl=0
Cayman Islands for Holding Companies
Along with its fellow Overseas Territories, Crown Dependencies and other international financial centres, the Cayman Islands has comprehensive legislation and regulations requiring legal entities domiciled or registered in the Islands and carrying on certain activities to have demonstrable substance in Cayman.
The International Tax Co-operation (Economic Substance) Act (Act) reflects Cayman’s commitment to its obligations as a member of the OECD / G20 global Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and corresponding EU requirements for no or nominal tax jurisdictions.
This briefing summarises the key elements of the Act, which has been subject to various updates since its introduction, and draws upon guidance (Guidance) and enforcement guidelines (Enforcement Guidelines) issued by the Cayman Islands Department for International Tax Co-Operation (DITC) which has responsibility for the supervision and implementation of the Act.
Overview
Before 31 January each year all entities must submit an Economic Substance Notification to the Cayman Islands Registrar
Within 12 months after financial year end all Relevant Entities that carried on one or more Relevant Activities must submit an Economic Substance Return to the DITC
Within 12 months after financial year end all entities that claimed to be tax resident outside of the Cayman Islands and that carried on one or more Relevant Activities must submit an Economic substance return – tax resident in another jurisdiction form (TRO Form) to the DITC
The Act requires that each legal entity domiciled or registered in the Cayman Islands must make an annual notification (referred to as an Economic Substance Notification or ESN) as to whether or not it was carrying on one or more of a defined list of activities (Relevant Activities) in the prior year and if it was, the date of its financial year end, whether it is tax resident in a jurisdiction outside of the Cayman Islands and certain identification and contact information. Entities which are in scope (Relevant Entities) and which were conducting any Relevant Activity are required to meet an economic substance test (ES Test) in respect of such Relevant Activity.
The requirements of the ES Test vary depending on the Relevant Activities conducted, and each Relevant Entity conducting one or more Relevant Activities must make an annual report (referred to as an Economic Substance Return) in order to enable their compliance with the requirements of the ES Test to be assessed or submit a TRO Form where the Relevant Entity is tax resident outside of Cayman. The DITC is responsible for determining whether a Relevant Entity has satisfied the ES Test.
Relevant Entities
Relevant Entities include all Cayman companies (including foundation companies), LLCs, LLPs, registered foreign companies and partnerships (including exempted limited partnerships, general partnerships, limited partnerships and foreign limited partnerships), except:
(a) investment funds or entities through which investment funds directly or indirectly invest or operate
(b) entities which are tax resident outside of the Cayman Islands (including, subject to certain conditions, entities which are disregarded entities for US income tax purposes)
(c) entities which are authorised to carry on business locally in the Cayman Islands as a domestic company or local partnership
An entity which carried on a Relevant Activity in the reporting year and which claims tax residency outside the Cayman Islands must submit an annual return declaring the jurisdiction in which it is tax resident and providing documentary evidence of its tax residency outside the Islands. This return also includes information on the entity’s immediate parent, ultimate parent and ultimate beneficial owner. All information submitted by such an entity to the DITC will be shared with tax authorities in the jurisdiction in which they are claiming residence and the jurisdictions of their immediate parent, ultimate parent and ultimate beneficial owner.
An entity which meets the definition of an investment fund in the Act, which may be the investment fund itself or an entity through which an investment fund directly or indirectly invests or operates (which would also generally include the general partner of an investment fund), is not a Relevant Entity and is not subject to an ES Test. It is, however, required to file an annual Economic Substance Notification to notify the DITC of its classification as an investment fund and to provide fund registration details (where relevant).
Relevant Activities
The Relevant Activities are:
- fund management business
- banking business
- insurance business
- financing and leasing business
- shipping business
- distribution and service centre business
- headquarters business
- intellectual property business; and
- holding company business.
The Guidance issued by the DITC provides detailed information and sector-specific examples regarding the scope of each of these Relevant Activities and, other than investment funds, all entities will need to consider their operational activities carefully in order to determine whether they may be conducting a Relevant Activity.
The ES Test
Relevant Entities that carry on a Relevant Activity must satisfy the ES Test and, where a Relevant Entity carries on more than one Relevant Activity, it must satisfy, and report on its compliance with, the ES Test in respect of each such Relevant Activity. To satisfy the ES Test in relation to a particular Relevant Activity, a Relevant Entity must:
- carry on its “core income generating activities” in relation to that Relevant Activity in the Cayman Islands
- be “directed and managed” in an appropriate manner in the Cayman Islands in relation to that Relevant Activity
- having regard to the level of relevant income derived from the Relevant Activity carried out in Cayman:
(a) have an adequate amount of operating expenditure incurred in Cayman
(b) have adequate physical presence (which may include maintaining a place of business or plant, property and equipment) in the Cayman Islands
(c) have an adequate number of full-time employees or other personnel with appropriate qualifications in Cayman (note that these may include outsourced personnel provided they are located in Cayman)
A Relevant Entity may satisfy the requirement that its core income generating activities be carried out in Cayman if those activities are conducted by any person and the Relevant Entity is able to monitor and control the carrying out of the core income generating activities by that other person, meaning it is permissible for Relevant Entities to implement appropriate outsourcing arrangements with service providers in Cayman. Core income generating activities should not be outsourced to service providers outside Cayman. Wherever an entity outsources core income generating activities, the outsourced service provider will be required to verify certain information regarding the outsourcing arrangement to the DITC.
The concept of holding company business (which is one of the nine Relevant Activities) is limited to Relevant Entities that only hold equity participations in other entities and only earn dividends and capital gains (known as Pure Equity Holding Companies). A Pure Equity Holding Company is subject to a reduced ES Test which is satisfied if it confirms that it has complied with all applicable filing requirements under relevant Cayman Islands legislation and has adequate human resources and premises in Cayman for holding and managing equity participations in other entities. In practice a Pure Equity Holding Company will commonly be able to satisfy the reduced ES Test by appointing a reputable registered office in Cayman.
Relevant Entities conducting “high risk intellectual property business” are subject to a higher burden of proof in demonstrating that they maintain adequate economic substance in Cayman. High risk intellectual property business generally includes scenarios where an entity did not create the IP which it holds and now generates income from that IP either by licensing it to other group entities or as a consequence of the activities of other group entities.
In order to meet the ES Test, an entity conducting high risk IP business must provide the DITC with materials which demonstrate that there is, and historically has been, a high degree of control over the development, exploitation, maintenance, protection and enhancement of relevant IP assets, exercised by an adequate number of full-time employees with the necessary qualifications that permanently reside and / or perform their activities within Cayman.
The Guidance issued by the DITC provides further information as to the meaning of “adequate” and “appropriate” for the purposes of the ES Test. Notably, such Guidance accepts that what is adequate or appropriate for each Relevant Entity will be dependent on the particular facts of the Relevant Entity and its business activity and requires that the directors (or equivalent) of each Relevant Entity make a determination on these matters in good faith.
Core income generating activities
The Act defines “core income generating activities” (CIGA) as activities that are of central importance to a Relevant Entity in terms of generating relevant income (meaning income derived from the Relevant Activity) and requires that these be carried on in Cayman. The Act provides examples of core income generating activities for each Relevant Activity. For example, for financing and leasing business, CIGA include:
- negotiating or agreeing funding terms
- identifying and acquiring assets to be leased
- setting the terms and duration of financing and leasing
- monitoring and revising financing or leasing agreements and managing risks associated with such financing or leasing agreements
These lists of CIGA are not prescriptive and it is not the case that a Relevant Entity which conducts the Relevant Activity must conduct all of the listed CIGA. However, to the extent the Relevant entity does conduct the relevant CIGA, that CIGA must be conducted in the Cayman Islands. It should also be noted that where a Relevant Entity contracts to conduct a CIGA, it will be considered to be doing such an activity notwithstanding any delegation arrangement.
Directed and managed
To be considered to be “directed and managed” in an appropriate manner in Cayman generally requires that:
- the Relevant Entity’s board of directors, as a whole, has the appropriate knowledge and expertise to discharge its duties as a board of directors in relation to the Relevant Activity
- meetings of the board of directors are held in Cayman at adequate frequencies given the level of decision making required in relation to the Relevant Activity
- there is a quorum of directors present in Cayman during the meetings described in the second bullet point above
- the minutes of the board of directors record the making of strategic decisions of the Relevant Entity at the board meetings held in Cayman
- the minutes of all meetings of the board of directors, together with other appropriate records of the Relevant Entity, are kept in Cayman
A meeting will be considered to be validly held in Cayman for these purposes only if:
- the situation of that meeting would be deemed to be in Cayman under the constitutional documents of the Relevant Entity (this is commonly decided by the location of the chairman of the relevant meeting)
- at least that number of directors of the Relevant Entity constituting a quorum are physically present in Cayman for the meeting
Key dates
The Act and accompanying regulations provide a timetable for compliance, notification and reporting.
Compliance
The ES Test must be satisfied from the date on which the Relevant Entity commences the Relevant Activity until the date that the Relevant Entity ceases carrying on the Relevant Activity (or ceases to be a Relevant Entity).
Notification
By 31 January in each calendar year, all legal entities domiciled or registered in the Cayman Islands must file an Economic Substance Notification to notify the DITC as to whether they conducted any Relevant Activities and whether they were a Relevant Entity during their financial year which commenced in the prior calendar year (that is the notification in 2025 would relate to financial years commenced in 2024, whether that be 1 January 2024 or 1 September 2024, for example).
This notification is made via the entity’s registered office to the Cayman Islands Registrar. Notwithstanding the 31 January deadline, no penalties accrue unless the notification has not been submitted by 31 March. Any legal entity which intends to terminate, migrate to another jurisdiction, deregister as a foreign company or be merged or consolidated with one or more other entities, is required to submit a notification for the current year before it becomes deactivated by the Cayman Islands Registrar.
Reporting for Relevant Entities
Each Relevant Entity conducting a Relevant Activity must submit an Economic Substance Return to the DITC within 12 months of the end of its financial year regarding its compliance with the ES Test during that financial year. This return includes various financial, ownership and other data and any Relevant Entity conducting a Relevant Activity must also provide its books of account or financial statements for the relevant financial year.
Reporting for entities claiming tax residency outside of the Cayman Islands
Each entity that carried on a Relevant Activity but which is not a Relevant Entity by reason of its tax residency in a jurisdiction other than the Cayman Islands must submit a TRO Form to the DITC within 12 months of the end of its financial year. As noted above, this includes providing documentary evidence of its tax residency outside Cayman and providing information on the entity’s immediate parent, ultimate parent and ultimate beneficial owner.
Record keeping
A Relevant Entity that is required to satisfy the ES Test in relation to a Relevant Activity must retain for six years after the end of its financial year records that relate to the information required to be provided to the DITC.
To incorporate a Company in the Caymans with OCI usually costs $US $US 3,271.50 and from 2nd year $$2,721.50. For details of what’s included in the set-up price and annual fee from 2nd year, check these links:
For details in regards to the features and benefits of a Caymans Exempt Company check this Link: https://www.dropbox.com/scl/fi/unchix11ik987n9x3gl9y/Caymans-Exempt-Companies-Fact-Sheet.docx?rlkey=oezdaxq7s2gh4h5shx5z3y5hh&st=mekwvb8r&dl=0
