I’m often asked by EU resident clients what’s the most tax efficient way to invest in the USA?
The starting point is to set up (a) a Tax Free Offshore Company(“IBC”) in a country which does not have a TIEA (Tax Information Exchange Agreement) with your home state + (b) a Private Interest Foundation to hold the shares of the IBC. Such a structure should leave you liable for tax at home only on income actually paid to you by the Offshore Company.
But what if the plan is to hold shares in a US Company or Companies?
When dividends (+ royalties, interest etc) are paid by a US Company to a non-resident US Shareholder for/of the Company the US applies Witholding Tax (“WHT”). The base rate for WHT in the US is 30%.
That said some 61 countries have negotiated Double Taxation Avoidance Treaties (DTA) with the US and many of these treaties provide for discounted WHT rates (including 4 low tax countries ie Cyprus, Ireland, Netherlands and Malta). In short if you/your Company hold shares in a US Company, and you/your Company are a resident of a country which has a DTA with the USA, instead of paying 30% tax in the US on dividends paid to you by the US Company you could end up paying as little as 5% (or less, see below)
How is it done?
What you do is you interpose a Holding Company (incorporated in one of the 4 low tax centres – see details of each below) between the US Company and your tax free IBC. (ie the Holding Company holds/own your US Shares. Your IBC owns the Holding Company).
If you set up a Cyprus Company to hold the shares of a US Company/s the US charges Witholding Tax (“WHT”) as follows:
(a) 15 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 5 percent of the gross amount of the dividend if:
(i) During the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation; and
(ii) Not more than 25 percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50 percent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received).
Tax Payable in Cyprus
The corporate tax rate for tax year 2013 onwards is 12.5%.The rate is applicable on business income derived by a company (defined as “any body with or without legal personality, or public corporate body, as well as every company”, but it does not include a partnership). Cyprus Corporate tax is not charged on dividends received by Cyprus resident Companies. Income deriving from the sale of securities is also tax exempt. Only expenses wholly and exclusively related to the business activity are deductible.
Note Cyprus does levy a “Special Contribution for defence” tax on dividend receipts at 17% but an exemption applies if “dividends received by a company resident in Cyprus or a company not resident in Cyprus which maintains a permanent establishment in Cyprus from a company which is not resident in Cyprus”. This exemption does not apply if: (a) more than 50% of the activities of the non-resident dividend paying company lead to investment income; and (b) the foreign tax burden on the income of the dividend paying company is substantially lower than the tax burden of the Cyprus tax resident company or the non-resident company which has a permanent establishment in the Republic.”
Cyprus does not levy WHT when dividends are paid from a Cyprus Corp to a non-resident shareholder.
The DTA between the USA and Ireland provides that:
- Dividends paid by a company that is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State (In this case ‘contracting states’ refers to both the USA and Ireland.)
- However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, except as otherwise provided in this Article, the tax so charged shall not exceed
(a) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns at least 10 percent of the voting stock of the company paying the dividends;
(b) 15 percent of the gross amount of the dividends in all other cases.
Tax Payable in Ireland
The corporation tax rate in Ireland is 12.5% for active income from the conduct of a trade in Ireland. A corporation tax rate of 25% applies to passive income and to income from certain defined activities. Capital gains are taxed at 33% with a participation exemption for gains on disposals of certain shareholdings of 5% or more of companies resident for corporate income tax purposes in EU or income tax treaty states where the company being disposed of or the Irish parent and its 5% subsidiaries taken together are wholly or mainly engaged in carrying on activities in the nature of a trade.
However a discounted rate of 12.5% applies to dividends received by an Irish Company from Companies tax resident in the EU or from a company tax resident in a country which is a part to the OECD convention on mutual assistance in tax matters (this includes the USA). AND a credit for underlying corporate tax and WHT generally is available for foreign tax paid.
Dividends paid from an Irish company to a non-resident company or individual are taxed at a base rate of 20% withholding tax unless the holding company is another EU company or located in a country which has a DTA with Ireland (which might afford discounts or even complete exemption).
Per the treaty between the USA and the Netherlands where a Netherlands Holding Company owns shares in a US Company and is paid dividends it may be taxed in the US and according to the laws of the US but if the beneficial owner of the dividends is a resident of the Netherlands, the tax so charged shall not exceed:
a) 5 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 percent of the voting power of the company paying the dividends;
b) 15 percent of the gross amount of the dividends in all other cases.
However the Netherlands, in 99% of the cases, will not charge corporate income tax on foreign dividends and capital gains realised on foreign shareholdings. To qualify for this ”participation exemption” only a few easy-to-meet criteria must be fulfilled:
- The Dutch entity must own at least 5% of the economical and legal interest in the foreign entity (both dividend rights and voting rights);
- The foreign entity must have a capital divided into shares;
- The foreign entity does not have to be subject to any foreign profits tax, unless the entity qualifies as a ”passive” entity as defined by law, in which case the foreign underlying profits tax must be 10% or more.
So if a Dutch company receives a dividend from a foreign shareholding which meets these criteria the Dutch entity will not have to pay corporate income tax on the dividend. The same is true if the Dutch entity should realise a capital gain with the shares in the foreign entity. The Dutch participation exemption covers ”benefits of whatever kind and whatever form realized with qualifying foreign shareholdings” so a dividend is treated the same way as a capital gain when applying the participation exemption.
Tax In the Netherlands
The corporate tax rate in the Netherlands is 20%/25% – The first EUR 200,000 of taxable profit is taxed at 20%. These rates have been in force since 2011. The rate of tax the Netherlands charges is 20% for the first 200,000 EUR of taxable profit, any further taxable profit is taxed at 25%.
Dividends payable by a Netherlands Company to a foreign shareholder are subject to WHT at a rate of 15% which can be reduced to as low as 0% if the shareholder receiving the dividend is located in a country which has a favourable DTA with the Netherlands.
An additional exemption applies – Dutch tax law contains a special provision for dividends paid by Dutch corporations to foreign shareholders which originate from dividends received from other countries. In short, if a Dutch corporation re-distributes dividends which have been subject to a foreign withholding tax, the Dutch corporation is under certain circumstances entitled to a credit on the Dutch withholding tax which it is supposed to pay over the dividends it declares itself (indirect tax credit). The credit can amount to 3% of the dividend declared.
If the dividends are paid by a company that is a resident of the United States to a resident of Malta who is the beneficial owner thereof, except as otherwise provided in the Malta/US DTA, the tax charged by the United States shall not exceed: i) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns directly at least 10 percent of the voting stock of the company paying the dividends; ii) 15 percent of the gross amount of the dividends in all other cases.
The corporate tax rate in Malta is 35%. Malta operates a full imputation system of taxation for both residents and non-residents, which ensures the full relief of economic double taxation upon the distribution of taxed profits by companies resident in Malta.
On the distribution of taxed profits, the shareholders may opt to claim a partial/full refund of the tax paid by the distributing company. As a general rule, the tax refund amounts to six-sevenths of the tax paid. The refund will be reduced to two-thirds if the shareholder claims double-taxation relief and five-sevenths in those cases where the distributed profits are derived from passive interest or royalty income being subject to foreign tax at less than 5%. Dividends and capital gains derived from participation holdings will qualify for a full refund. The Malta tax suffered on distributed profits hence ranges between 0% and 10%. The tax paid on profits derived, directly or indirectly, from immovable property situated in Malta is not available for refund.
In cases such as this (ie where you have a Maltese company which has claimed double taxation relief) a two-thirds (2/3) refund of Maltese corporate tax (35%) paid by the Maltese Company should be available to the shareholder of the Maltese company.
Here’s how that would work practically…
Say you set up a Malta Company and it receives a dividend of $US100,000 from a US Company. 5% of that is paid to the US govt for WHT. Of the $95,000 remaining the Malta Company pays 35% tax ie $33,250. But Malta operates a tax refund system whereby the shareholder, in the case of a dividends receipt, can claim back two thirds of the tax paid by the Company (ie $22,166). That means the Malta Company would have paid $11,084 tax on a receipt of $95,000 ie 11.67%.
Malta Holding Company Potential 100% Tax Exemption
Apart from the preferential tax treatment offered to trading companies outlined above, a Malta Holding Company may benefit from a total exemption on corporate tax in Malta, provided the criteria listed below are satisfied.
Qualifying as a Participating Holding
The special treatment offered to a Maltese Holding company is that it provides a choice between a full-refund (i.e. 100% of tax paid will be refunded to the shareholder) or a total tax exemption (i.e. no need to proceed to tax payment) on any dividend income or capital gains, provided it qualifies as a ‘participating holding’. Opting to be exempt rather than getting the refund has a number of advantages, including cash flow advantages and non-disclosure to the Maltese Revenue in Tax Returns.
A Maltese Company qualifies as a participating holding (total tax exemption) in a non-resident entity if:
• it holds directly at least 10% of equity shares of an entity (eg a US Company); or
• it is an equity shareholder in a company and is entitled to acquire the entire balance of shares; or
• it holds equity shares in an entity and is entitled to first refusal in the event of the proposed disposal, redemption or cancellation of all of the equity shares; or
• it holds equity shares in an entity entitling it to either (i) sit on the Board of Directors or (ii) appoint a person to sit on the Board of that company as a director; or
• it holds equity shares in an entity having an investment value of €1.164.000,00 and held for an uninterrupted period of not less than 183 days; or
• it holds equity shares for the furtherance of its own business and is not held as trading stock for the purpose of a trade.
Additionally to the above-referred criteria, in the case of dividend income, the full refund or exemption will only be made available to the Maltese participating Holding if the non-resident entity held, paying the dividend satisfies any one of the below three conditions:-
• Is resident or incorporated in the European Union; or
• Is subject to a minimum of 15% foreign tax; or
• Does not derive more than 50% of its income from passive interest and royalties (i.e. must be a trading entity).
If none of these three is satisfied, in order for the full refund or exemption to be made available BOTH of the below conditions must be met:-
• The equity holding by the Maltese Company in the body of persons not resident in Malta is not a portfolio investment; and
• The body of persons not resident in Malta or its passive interest or royalties have been subject to any foreign tax at a rate which is not less than 5%.
As I read it if you can’t meet the above criteria the maximum amount of tax you would pay in Malta would be 11.67%
Malta also does not charge withholding taxes on dividends paid by a Maltese Company to a foreign shareholder, only in the rare cases that the company issuing the dividend received its income from tax free sources.
In conclusion if you’re looking to minimise WHT tax on your US share portfolio both Malta and Cyprus seem to present themselves as interesting Holding Company jurisdictions.
Bear in mind local laws can also have an impact. Hence, before committing to incorporate an Offshore Holding Company, you would be wise to seek Legal and Financial advice from a local professional adviser (in both your Home Country + the Holding Company jurisdiction).