A holding structure is an effective asset protection and risk management vehicle. By using a canopy from which they suspend functioning subsidiaries or particular assets like stocks, intellectual property, immovable property, financial assets, or any other asset, a group can attain a separation of legal and financial liability between them.

Following are some essential factors to bear in mind prior to establishing an offshore holding company :-

1. Legal Structure

The eligibility of a legal structure will generally be based on the intent and targets of your holding structure. Generally, holding companies are set up as corporations. If your holding company’s intent is categorising various business assets, activities or units, fundraising, offering financing or leveraging tax planning strategies, along with other activities, it seems reasonable to employ a corporation that is a company confined by shares and a taxable entity which can leverage corporate tax advantages from international tax treaties and offer for stringent governance, management structure and requirements.

If your holding company’s intent is offering a cover of security and confining liability on particular assets like real estate, cash, and other financial assets, you can opt for an LLC structure. The capital of an LLC is segregated into membership interests, that might not be freely transferable and they do not form securities.

2. Economic Activities

One could examine carefully at the presence of tax treaties between the jurisdiction of the holding and the jurisdiction of the underlying operating organisations to ensure no extra and irrelevant tax liability come up on financing transactions, profit distribution, royalty payments and other payments between affiliates.

3. Equity Holdings

Whether the organisation holds minor equity stakes in underlying organisations or has completely owned subsidiaries will create an effect while establishing the jurisdiction of incorporation. Particular jurisdictions offer for participation waivers on dividends and/or capital gains given that the holding owns a specific percentage of ownership from a subsidiary.

4. Active Businesses

Similarly, if the holding is going to involve in business activities apart from pure holding, one must consider how payments and transactions between affiliates are treated between jurisdictions and whether withholding taxes are applicable, waivered or lowered under tax treaties.

5. Leasing

If the holding will lease assets to their subsidiaries one must keep a check at how these payments are going to be taxed and ensure these transactions are performed at a fair market value based on the applicable standards and that these transactions are not interpreted by profit shifting or tax base erosion plans.

6. Financing

While investigating for adequate jurisdictions to determine a holding company utilised for financing, one must consider at how interest payments are taxed at origin and entrusted in the recipient, and whether interest payments are deductible by the subsidiary and whether they are issued to diluted capitalisation provisions or other interest deductibility constraints. Furthermore, they should be attentive of how these transactions must be executed and the reporting needs which might come up from them.

An Interesting Read: What is an Investment Holding Company?

7. Governance and Liability

Limited companies are confined in liability to the creditors and other obligors only up to the resources of the company and the unpaid amount of their shareholdings. Hence, a parent company must only be accountable for the acts of a said subsidiary up to the unpaid amount of its shareholdings.

The categorisation of liability and risk management optimisation are the main advantages of employing a holding company. Typically, the fact that a holding and a said subsidiary share common control must not be a decisive characteristic to risk liability protection between related entities –although, it can be the apt way to precisely distinguish control and management between the holding and the subsidiaries.

All transactions between a parent company and subsidiary entities must be adeptly recorded as these are external transactions and not internal movements of cash. Each entity must have its set of books and accounting records and separated bank accounts. Entities must be precisely differentiated, i.e. no subsidiary should be conducting business in the name or on behalf of the parent entity.

8. Taxes

Holding companies are generally more flexible in comparison to their subsidiary equivalents, since most of their balance sheet comprises of intangible assets, and their operations can be majorly related to finances which might not be linked to a particular jurisdiction. Hence, one must review all possible structuring alternatives accessible globally.

One of the benefits of being flexible is that it can permit for an advantageous international structuring and tax planning strategy. Holding companies are set to accrue and/or aggregate profits from subsidiaries for additional reinvestment and/or distribution to the holding’s shareholders. Profits can be issued to corporate tax and dividend withholding tax at the subsidiary level, to corporate tax at the holding level and can be additionally issued to withholding tax when given amongst individual shareholders. Shareholders can be issued to personal income tax on these dividends. When the holding sells the subsidiary, there can be tax applicable on the capital profits.

Read more: Labuan Investment Holding Company

Labuan Investment Holding Company

Labuan Investment Holding Company (IHC) provides 100% foreign ownership that is one of the central propositions to drawing several business owners to obtain overseas businesses, stocks and even real estates all while enjoying zero tax! It can be used as a structuring resolution as the ownership is preserved and to strengthen all foreign organisations and entities under one holding company. This process of structuring is considered beneficial by which acquisitions would be easier when buying or liquidating as an entire unit. All dividends attained are subject to 3% tax although any Malaysian capital profits and rental proceeds are taxable at 24%. Additionally, occasional stocks / equities holding will also be zero % tax on its capital gain. If you are to consider about setting up an Investment Holding Company in Labuan, reach out to QX Trust team of consultants at CONTACT US or consultant@qx-trust.com to help you in understanding the process and eligibility accordingly.