Basing a Holding Company in a Tax Haven
A holding company is a parent corporation that owns enough voting shares in another company to control its policies and management. The benefits of forming a holding company include:
- The holding company itself is protected from losses if a subsidiary company fails and goes into liquidation. The creditors of the subsidiary company have no claim against the assets of the holding company.
- Different company assets can be put in different subsidiary companies. For example, one subsidiary may own the brand name and trademarks, another real estate, another equipment, and another to operate the trading business.
- Subsidiary companies may be located and operate in a country different from that of the parent company. The subsidiary most likely has its own senior management structure, products and clients.
- The ability to reduce subsidiary costs by having the holding company provides certain centralised services such as finance, administration, marketing, financial systems, etc.
- The ability to raise equity capital and loan funds more easily and cheaply than an individual subsidiary company (as it provides investors and lenders with lower risk than a subsidiary company).
The advantage of basing a holding company in a tax haven include:
- The holding company can pay nil tax. Pepsi, for example, is based in Denmark as holdings companies pay no tax there.
- Can apply the tax consolidation regime to wholly owned subsidiaries so that the losses of one group-company are available to the whole consolidated entity. In addition, intergroup transactions are eliminated for tax purposes.
- Franked dividends paid to the holding company are effectively tax-free.
- The holding company can charge the subsidiary companies for services provided and shift profits (subject to arms-length transfer pricing prices being charged).
"You’d be stupid not to try to cut your tax bill and those that don’t are stupid in business"
- Bono: U2