International Holding Companies

• it should have a broad tax exemption system for holding company income (dividends and gains from the sale of shares);
• it should have a large double taxation treaty network providing for reduction of or even exemption from withholding tax over dividend payments made to holding companies established in such country by subsidiaries of such companies (and protection from taxation over gains from the sale of shares in foreign companies by the countries in which the latter companies are established). Many countries levy withholding taxes. These taxes are usually levied over payments of dividends, interest and/or royalties made by residents of those countries. The size of these taxes varies, but is most often between 15 and 20 percent. Double tax treaties exist that allow for a reduction or even elimination of this withholding tax in case the recipient of the payment is resident of a country that has concluded a tax treaty with the country of which the person making the payment is resident. 
• it should not have withholding taxation over dividend payments itself (or it should be easy to circumvent such taxation);
• for investments into the EU it is very beneficial if the country itself is an EU-Member, leading to access to the so-called EU Parent-Subsidiary Directive for companies established in such country. The EU Parent-Subsidiary Directive under circumstances provides for withholding tax exemption for dividend payments between EU-companies. 

When is the utilisation of a foreign holding company recommendable?

There is a number of situations when the set up of a holding company could be of advantage including;

• When an investor strives for;
  - Avoidance, reduction or deferral of home country tax;
  - Reduction of foreign dividend withholding tax.
• When confidentiality of ownership is required.
• When an investor wishes to safeguard the ownership outside the country of investment.
• When a joint venture must be formed by parties from different countries.

For the international businessman or company active in cross-border investments there are several tax issues that need to be examined before making the investment. Perhaps the two most important questions are:

• How can I transfer profits out of the country of investment in the most tax efficient way?
• When I wish to exit my investment, partly or wholly, how can I minimize the profit tax payable on the capital gain?

The answer to the above two questions can be the setting up of a holding company in a foreign country.
 
The main functions of holding companies usually are:

• The ownership of shares in other companies;
• To finance their subsidiaries.

As mentioned, for a country to be an attractive location in which to set up a holding company several aspects need to be assessed. The most important tax factors include:
 
Dividends remitted:  Dividends remitted by the subsidiary to the holding company must either be exempt from or subject to low withholding tax rates in the subsidiary's country.
 
Dividends received: Dividend Income received by the holding company from the subsidiary must either be exempt from or subject to low corporate income tax in the holding company's country.
 
Outgoing Dividends: Outgoing dividends paid by the holding company to its parent company or individual shareholder must either be exempt from or subject to low withholding tax rates in the holding company's country.
 
Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares of the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's country and the country of residence of the subsidiary whose shares are sold.
 
The existence of a double tax treaty between the country where the investment is made and the country where the holding company is located in order to achieve the desired minimization of (withholding) taxes.