The term “holding company structures” is easily understood in South-East Asia as an efficient way to manage group companies. Often it creates visions of complex top-down pyramids formed for tax avoidance. While there maybe groups that are formed for this very purpose, my experience has been quite different.
In our experience, holding company structures cater to groups that need presence in more than one geographical area: each with its own multifaceted compliance and tax requirements. In this sense, it helps for one centralised company to “hold” subsidiaries under its umbrella. In the mid to late 2000’s the Cayman and BVI were popular destinations, due to low compliance requirements and easy annual maintenance. They also have low or no taxes. As we moved towards 2010’s; the popularity of these destinations dwindled.
Currently there are many destinations where the tax and corporate compliance are straight-forward and friendly to companies. A head-line tax between 15-20% and the presence of R&D friendly tax policies have greatly helped many South-East Asia countries top the ease of doing business index year after year.
While structuring companies is a complex process that requires careful thought and deliberation, here are some things to consider.
1. Is a holding company structure right for you?
The simple answer is - it is not the right choice for many groups. We’ve seen many a times people advised incorrectly regarding setting up companies in certain jurisdictions. It’s not a one size fits all – there was indeed a time where this was considered even fashionable. Holding companies are generally “private companies” and just like how private companies work in the UK, they have requirements such as a local director, a registered office and often a Company Secretary in most jurisdictions around the world.
When you don’t “employ” someone locally, that means you must add in nominee services such as a nominee director to comply with local laws. Due to the innate risk of the job, service providers charge high fees for these services and it’s a repeated requirement year after year.
More than the costs involved, you should be very aware of what ongoing maintenance requirements you have? Is it worth opening a company in a jurisdiction where you don’t have an established market and never expect to employ people?
2. It might just be right for digital nomads
The pandemic has normalised “mobile entrepreneurs” or “digital nomads” and the lifestyle that comes with it. They consider a holding company a good idea as they don’t need to worry about where they’d be based individually as they run the business from a laptop. It can work well in such cases; we’ve seen this through quite successfully in recent years. Most of them don’t worry overly about taxes and compliance when they work out where to base themselves.
The factors are more personal and cultural – where do you eventually see yourself settling down? Where are most of my employees or contractors going to be based? Where are sales tax laws simple to follow when they have a product out in the market?
UK is fairly popular in that regard – even with a headline tax of 19% currently (And soon increasing to 25%) due to its proximity to Europe, culture and lifestyle as well as the freedom and general safety it affords residents.
3. Group relationships
Another factor that affects how effective your structure would work is how many group companies you decide on and what would be the flow of transactions between these companies. Typically, a parent would have several fully-owned (100% shareholding) or majority owned (51% and above) subsidiaries.
The subsidiaries are also private limited companies and in some cases branch companies. Subsidiaries operate on their own and will have local employees and offices. They’d help with establishing and maintaining local clientele and sales support. They’d have jurisdictional tax and corporate laws to comply with.
Generally, this is where we (Evalua8) step in. We maintain a centrally running finance and operational function. We say operational function as we usually work directly with Group COOs and CEOs maintaining a fully functioning finance department as well as are involved in cross-functional project management.
Any service provider you choose must understand what each of the group companies do, what product or service is provided by each of the companies as well as how money move between companies. That’s simplifying it but you get an idea.
The biggest problems our clients have faced before finding us is,
- A local provider who doesn’t understand the complexities of cross-border transactions
- A service provider who does understand it but are very expensive
- A service provider that doesn’t have industry level knowledge. This is one of the reasons why we work almost exclusively with SAAS and currently crypto SAAS companies.
4. Transfer pricing
Transfer pricing sounds very complex and it can be in a lot of scenarios. Fundamentally transfer pricing establishes fairness in pricing when group companies deal with each other. Tax rules established rules around transfer pricing to ensure you have priced goods and services that you deliver between group companies “fairly”. I’ll add the definition from Investopedia here for greater clarity -
Transfer pricing is an accounting and taxation practice that allows for pricing transactions internally within businesses and between subsidiaries that operate under common control or ownership. The transfer pricing practice extends to cross-border transactions as well as domestic ones.
One common mis-conception we’ve found with companies is that they misunderstand this to be applicable when two or more jurisdictions are involved. This is incorrect. As the definition rightly points out above, it’s applicable even when the companies in question are all based in one country.
Need more info?
While this is only scratching the surface of corporate structuring and holding company structures, we hope to bring you some case studies on how we’ve worked with our clients in delivering value across their group. This is queued up for the near future, so stay tuned. Meanwhile, feel free to email me on firstname.lastname@example.org for comments or queries.
You have the vision, we deliver the structure.
References and notes
The pictures used in this have been self prepared using the wonderful Canva or sourced from pexels.com
Image 2 of the UK - image courtesy with much thanks - https://www.pexels.com/photo/architecture-booth-buildings-bus-374815/