Strategies for Your Holding Company Abroad
Strategies and Advantages of a Holding Company
Most people know the basic benefits of a holding company. Far fewer have looked at what a double holding, or a holding with an international part, can add.
At PMG, we want to give you clear facts and a better view of your options. Our specialists also offer a free, no-obligation first consultation.
Table of Contents
- The Commonly Known Advantages of a Holding
- The Less Familiar but Highly Effective Advantages of a Holding
- Scenario 1: The Simple Holding Company
- Scenario 2: The Double Holding Company
- Scenario 3: The Double Holding with an International Element
- Scenario 4: The International Holding Company with Tax Advantages
- Scenario 5: The Holding Company and Double-Taxation Treaties
- Scenario 6: Holding a Stake in an International Company through Your Holding
- How and When to Set Up Your Holding
- Individual Advice and Tailored Solutions
- Free Consultation
The Commonly Known Advantages of a Holding
The well-known benefits of a holding company are:
- tax advantages,
- better risk spreading,
- strong business continuity,
- the ability to manage your own cash flow precisely,
- more cash when you sell shareholdings,
- many ways to raise capital,
- the ability to ring-fence risks,
- more ways to reinvest profits,
- a way to avoid surprise tax bills,
- and several useful options for succession planning.
The Less Familiar but Highly Effective Advantages of a Holding
The benefits that people talk about less often include:
- real gains from the smart use of international double-taxation treaties,
- gains from using a partnership inside the holding structure,
- gains from the holding company's own shareholdings in international companies,
- large tax advantages when you sell a subsidiary.
Planned with care and set up correctly, a holding company can become a very useful tool. For the business owner, it can bring strong security, more flexibility and a better quality of life. It also opens the door to legal tax advantages that are becoming harder to find.
Scenario 1 The Simple Holding Company
Mel runs a successful metalworking business that makes garden fences. The business is a limited company, Fence Co. Ltd. Ten years ago, Mel moved his shares in Fence Co. Ltd. into his holding company. Today, Mel wants to grow his range and start making playground equipment as well as garden fences.
Making and selling playground equipment carries a higher product-liability risk. Mel does not want to run that line through his existing Fence Co. Ltd. Using the holding company itself for production is not the right answer either. So the holding simply sets up a new company, Play Co. Ltd., which then develops, makes and sells the playground equipment.
The money to develop and build the first units comes from the profits of Fence Co. Ltd. The holding company receives these profits largely free of tax. Compared with starting fresh without a holding, this generally leaves at least 20 percent more cash to invest.
Over years of careful reinvestment, more funds have also built up, and the tax savings show clearly in the totals. In short, Mel has far more capital for his project than if he had taken all the profits out privately and paid tax on them along the way.
So Mel has used, at least in part, these advantages:
- the ability to manage his own cash flow precisely,
- tax advantages,
- the ability to ring-fence risks,
- better risk spreading,
- more ways to reinvest profits.
Scenario 2 The Double Holding Company
Let us change the scenario above. Now Fence Co. Ltd. and the holding company are owned not only by Mel, but also by his business partner, Dan.
Dan has no interest in making playground equipment. Because he co-owns both Fence Co. Ltd. and the holding company, Mel cannot set up a new subsidiary under the shared holding.
A better plan would be for Mel and Dan to hold their interests in the holding company through a partnership. Mel and Dan would then no longer own a simple holding company. They would own a limited partnership structure with a corporate general partner at the top. Mel could then set up a second limited partnership structure to run his Play Co. plan, using all the available advantages.
In this way, profits from the shared holding with Dan could be offset against losses from the new Play Co. partnership, which develops and builds the playground equipment.
With this structure too, Mel has more cash than if he had paid for the new business out of taxed dividends from the holding company. The structure can also free up more allowances, so further tax advantages may follow.
Scenario 3 The Double Holding with an International Element
A double or two-tier holding is most interesting when there is an international part.
For this short scenario, let us say Mel wants to make his playground equipment not in his home country, but in another EU country. Thanks to the double holding, this is easy for Mel. His careful planning brings a further benefit: the issue of exit tax no longer applies in the same way. The limited partnership structure can shield him from the exit tax rules that many high-tax countries apply when shareholders move abroad.
So there is little to stop Mel from relocating.
Scenario 4 The International Holding Company with Tax Advantages
Depending on which countries are part of the holding structure, a double holding may bring further advantages.
For example, the profits of subsidiaries based in different countries can generally be pooled tax-free and then paid out tax-free to the shareholder.
At the same time, the shareholdings underneath can usually be sold largely tax-free, no matter where the shareholder lives.
Scenario 5 The Holding Company and Double-Taxation Treaties
The double holding company is also very interesting when it works across borders and uses an existing double-taxation treaty.
With careful planning and a well-thought-out structure, companies and shareholders from different countries can do business in one place without paying tax on the resulting profits again at home. This generally becomes possible when the national tax rules and the existing double-taxation treaties are matched with care.
Profits can then, for example, be taxed only in Cyprus, an EU member state in the Mediterranean. In this way, shareholders, even those who do not live in Cyprus, can benefit directly from the low tax rates of the EU member state Cyprus.
Scenario 6 Holding a Stake in an International Company through Your Holding
Even a simple holding company can offer large advantages where international companies are involved. Under certain conditions, the tax on dividends may no longer apply. One basis for this can be the EU Parent-Subsidiary Directive within the EU.
When entering new markets or launching new products, it is worth thinking early about a restructuring that involves international companies or permanent establishments. With the right structure, a holding company can clearly increase the cash available. It can also make use of regional advantages, such as lower wage levels, easier access to qualified staff, or better production conditions.
How and When to Set Up Your Holding
Good planning lays a solid foundation.
The parent company, the holding, will later be the foundation of the whole structure. For this reason, it generally pays to draw on the experience of our Strategic Corporate Advisory team at this stage.
It also helps to stay open and alert while you plan a holding structure. Every structure has its own advantages, but also its own drawbacks. The drawbacks are often not obvious at first. In some areas there is a clear gap between tax law on one side and corporate and civil law on the other. Many business owners who discussed their holding only with their tax adviser, or only with their lawyer, have learned this the hard way.
Once international holdings and companies enter the picture, many local tax advisers and lawyers can no longer give reliable guidance. The subject is often too complex and unfamiliar for them to advise on a single case in a sensible way. In cases like this, you generally need specialists who focus on this area.
It also helps to look at the tax and legal sides together, not on their own. The best tax advantages count for little if the whole structure fails because one part has a poor liability setup. In the same way, an excellent risk-management setup does not help if there is no cash left for growth. And in the end, you can manage both and still find that the business slowly takes over your life.
It is generally best to keep all of these angles in mind at once: tax, legal, business and personal.
Planning and building the holding structure that fits your situation is a real challenge. Even professional advisers sometimes struggle with it. In our experience, specialists often have limited skill outside their own field, and are often happy to leave it to you to bring the different fields together. Without professional support and groundwork, this is hard to do.
Our team helps you build a complete strategy. We also help you understand, weigh up and put into practice the views, ideas and notes from your tax advisers, lawyers and financial advisers, together with you.
When is the right time to set up a holding company?
As with any other structure, your options grow with these factors:
- starting as early as possible,
- flexibility from everyone involved,
- the financial resources available,
- and the time you have.
So if you think you need to set up a holding company at home or abroad, let us talk about where you stand, your plans and your goals.
In a first conversation, which is free and without obligation, you can talk in confidence with one of our specialists about your own situation.
Perhaps you already have specific questions that are hard to answer online. Or you may have firm plans, with a few pieces still missing for the full picture. Wherever you stand today, we look forward to hearing from you and to a first conversation.
Individual Advice and Tailored Solutions
Whether your next move is private or for your business, tax plays a part in every decision. Our specialists bring the experience you need and build the right solutions for you.
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- to find clear answers to your current questions,
- to talk with us about possible approaches and solutions, and
- to get a clearer sense of our firm and how we work.
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