Ideal Characteristics for the Location of an International Holding Company
The location of a holding company is an important consideration in any international structure where the objective is to minimise the tax charged on the income flow. Ideally the company should be in a jurisdiction which:
- Has a good double tax treaty network, thereby minimising withholding taxes on dividends received.
- Is in the EU, and will therefore have access to European Directives. The Parent/Subsidiary Directive reduces withholding tax on dividends from EU investee countries to zero.
- Exempts dividend income from taxation.
- Does not charge capital gains tax on the disposal of subsidiaries.
- Does not impose withholding tax on distributions from the holding company to its shareholders.
- Does not impose capital gains tax on profits arising from the sale of shares in the holding company by non resident shareholders.
- Does not impose capital duties on the transfer of shares.
- Has certainty of tax treatment.
- Has low tax on other income.
Holding companies located in Cyprus, Madeira, Malta and the UK offer many of the advantages detailed above.
Double Tax Treaties
Cyprus has 50 tax treaties, Malta has 66 and Portugal 66. Madeira has access to the majority of Portugal’s double tax treaties. The UK has the largest network of double tax treaties in the world with over 120 in place.
Access to EU Directives
Cyprus, Malta and the UK are members of the EU. Madeira is an integral part of Portugal and therefore also has access to EU directives.
The Parent/Subsidiary Directive and the Interest and Royalties Directive in particular can offer substantial benefits.
Participation Exemption for Dividends and Capital Gains
All four jurisdictions have participation exemptions as summarised below:
To access the Cyprus Participation Exemption, which exempts tax on dividends, the Cyprus company must hold at least 1% of the shares of the paying company. If more than half of the paying company’s activities are from investment the headline tax of the paying company must not be less than 5%.
Capital Gains Tax is imposed on gains arising from the disposal of immoveable property in Cyprus and gains from the disposal of shares in companies that own immovable property in Cyprus. There is an exemption from capital gains tax on immoveable property acquired between 16 July 2015 and 31 December 2016.
Capital gains accruing from the disposal of immoveable property held outside Cyprus and shares in companies that own immoveable property outside of Cyprus are exempt from capital gains tax. The only exception to this is where the subsidiary in question holds immoveable property (land) in Cyprus.
There is a full participation exemption which exempts tax on dividends and capital gains if certain conditions are met. Under certain conditions the same applies to individuals.
For non-EU holdings the rate of tax on dividends and gains is 5% until the end of 2020.
To benefit from Malta’s Participation Exemption, which exempts tax on dividends and capital gains, the Malta company must hold at least 10% of the equity share capital of the paying company or have an investment in the paying company of at least €1,164,000 which is held for at least 183 days, or the Malta company must have the right to appoint a member to the Board of the paying company.
If the paying company is not incorporated in the EU it must be subject to domestic tax of at least 15% or not derive more than 50% of its income from passive interest and royalties.
Small companies are companies with less than 50 employees that meet one or both of the financial criteria below:
- turnover less than €10 million
- balance sheet total of less than €10 million
Small companies receive a full exemption from the taxation of foreign income dividends if these are received from a territory which has a double taxation agreement with the UK that contains a non-discrimination article.
Medium and Large Companies
A full exemption from taxation of foreign dividends will apply if the dividend falls into one of several classes of exempt dividend. The most relevant classes are:
- dividends paid by a company that is controlled by the UK recipient company
- dividends paid in respect of ordinary share capital that is non redeemable
- most portfolio dividends
- dividends derived from transactions not designed to reduce UK tax
Where these exemption classifications do not apply, foreign dividends received by a UK company will be subject to UK corporation tax. However, relief will be given for foreign taxation, including underlying taxation, where the UK company controls at least 10% of the voting power of the overseas company.
The UK does not charge capital gains tax on disposals by a trading company or by a member of a trading group. This relates to the disposal of all or part of a substantial shareholding in another trading company, or the disposal of the holding company of a trading group or sub-group.
To have a substantial shareholding a company must have owned at least 10% of the ordinary shares in the company and to have held these for a continuous period of twelve months during the two years before disposal.
To qualify for this exemption the investing company must still be a trading company or a member of a trading group immediately after the disposal. If it is no longer a trading company or member of a trading group, dissolution of the holding company should proceed immediately in order to qualify for the exemption.
Withholding Taxes on Dividends
Cyprus, Madeira, Malta and the UK do not charge withholding tax on dividends.
Imposition of Capital Gains Tax on the Sale of Shares in a Holding Company by Non-residents
Cyprus, Malta and the UK do not charge tax on gains from the sale of shares in a holding company by non-residents. This is also the position in Madeira, with the exception of shareholders based in blacklisted jurisdictions.
Capital Duty on Share Transfers
Cyprus, Madeira and Malta do not charge capital duty on transfers of shares in a holding company.
In the UK there is no capital duty on paid up or issued share capital. Stamp duty at 0.5% is, however, payable on subsequent transfers.
Certainty of Tax Treatment
In the correct circumstances It is possible to obtain tax rulings in each of the four jurisdictions.
Taxation on Other Income
Many holding companies will have income other than dividends and capital gains; for example management charges and interest.
In Cyprus other income is taxed at 12.5%. This is with the exception of royalties, which enjoy an 80% exemption, giving an effective rate of 2.5%.
Madeira companies can benefit from a reduced rate of tax of 5% until the end of 2020. The reduced corporation tax rate is applicable up to a ceiling of variable annual taxable income, dependent on the number of jobs created, as shown in the table below.
The jobs do not need to be full time jobs. Dixcart in Madeira operates Tempstaff, an employment agency which can supply appropriate members of staff.
The overall tax benefits granted to companies licensed to operate in the Madeira International Business Centre are, however, capped at one of the following amounts:
- 15.1% of the annual turnover, OR
- 20.1% of the annual earnings before interest, tax and amortisation, OR
- 30.1% of the annual labour costs
Malta charges tax on the profits from other income at 35%, but where these profits are from trading and used to pay a dividend to the shareholder, the shareholder receives a 6/7ths refund of the corporation tax paid. This gives a net Malta tax rate of 5%. A 5/7ths refund is applicable for tax paid on profits from passive interest and royalties, giving an effective Malta tax rate of 10%. In some cases, due to Malta’s generous double tax relief system, tax on passive interest and royalties can be reduced further.
The UK charges tax on profits from other income at the standard UK corporation tax rate. For the year commencing 1st April 2017 this is 19%, falling to 17% in 2020.
If you require additional information regarding holding companies in Cyprus, Madeira, Malta or the UK, please contact Robert Homem, Carlos Santos, Sean Dowden or Laurence Binge. Alternatively please speak to your usual Dixcart contact.
Updated: June 2017