The payment of capital gains is usually connected with the obligation to pay income tax, and not a paltry sum at that. This is one of the main nagging issues for entrepreneurs. The Polish holding company has existed in the Polish legal order for only a short time, and this institution, to a large extent, solves this problem. In this article, we discuss foreign holding companies in other European countries, i.e., in the Netherlands, Luxembourg, Cyprus and Switzerland.
If you want to discover tax differences between the Polish holding company and a foreign holding company, I invite you to continue reading.
Why do taxes in Europe differ, even though all the companies in question deal with…. holding operations?
In this respect, we also have tax competition in Europe, i.e., individual countries introduce a number of tax exemptions and allowances to make the local tax regime more advantageous and attract investors. The regulations for holding companies allow taxpayers to reap financial benefits from holding shares and stocks. These are exemptions both for dividends and for capital gains.
A holding company is also a form of an asset security, helping to improve financial flows within a group between its entities and ensures tax deferral for operating profits in such a structure if they are to be used for reinvestment. A holding company is also a way to separate the ownership of shares in operating companies from its owner and can be a practical alternative to the Polish family foundation. Another conclusion comes to mind — AIF (Alternative Investment Fund) is also a holding company!
For this reason, any holding company can be an attractive option for taxation of dividends and capital gains of companies forming a group as well as an organisational form of their ownership structure. Foreign holding companies serve the purpose of diversifying geopolitical risk and also aim at convincing, among others, an investor to take interest in e.g., your business. After all, it is so much easier to tell a good story of your business growth when you have a holding company in Zurich than when it is based in Łódź.
What are the benefits of using a holding company?
For entrepreneurs, the creation of a foreign holding company may be beneficial in many respects. First of all, favourable taxes may lead to a reduction in the tax burden associated with the payment of dividends and capital gains. This means greater flexibility and the possibility to plan finances, among others retaining a larger part of profits in the company, which can be reinvested in the development of the enterprise.
In addition, a holding company can serve as a controlling structure for other companies, enabling better management, tax planning, including optimisation of unnecessary costs and protection of assets (separation of shares ownership in operating companies by an additional holding company). It acts as a central point for the management of an investment portfolio and can provide greater transparency and efficiency in the management of different companies within a group.
Why does Cyprus still retain its popularity?
The income tax (CIT) for Cypriot companies is 12.5%. This does not always apply to passive incomes, as these may also be subject to the Special Defence Contribution. For this reason, we suggest caution when setting up your investment company (such a tax reaches 30%).
There is no capital gains tax in Cyprus
Revenues from the disposal of the so-called titles — it is a very broad catalogue of various types of financial instruments, and it also includes shares — which are exempt from tax in Cyprus without any additional conditions. To this day, Cyprus has not introduced capital gains tax regulations either for companies or for individuals.
Also, dividends received from foreign companies by a Cypriot company will not be subject to income tax in Cyprus. This will be the case if the following conditions are met:
- If a foreign company making neither direct nor indirect payments receives more than 50% of its income from passive incomes (non-commercial income) and
- if the same company pays taxes on its income which are significantly lower than the tax burden in Cyprus (a tax rate in the country paying a dividend of 5% or more meets this condition).
Note that also here, with regard to dividends, the Cypriot regulations are quite liberal. For example, no shareholding threshold is required, i.e., it is enough to have only 1% of the shares in the company paying the dividend and it will be exempt from tax in Cyprus. Such lenient exemption conditions are de facto unheard of in other tax jurisdictions.
In virtually all cases, there will be a total exemption from any tax on dividends or capital gains in Cyprus. Such exemptions mean that Cyprus offers many tax benefits and outshines other locations in Europe but let us see what the situation in other countries looks like!
How attractive is a holding company in the Netherlands?
The Netherlands has always been the most popular location for holding companies in the world. In the 1980s and 1990s, the so-called Dutch Sandwich was used – a company in the Netherlands with another parent company registered in the Netherlands Antilles. A Dutch company has always been a gateway to Europe for investors from all over the world. A lot has changed since then, but it is impossible to deny the Netherlands a good international position, and if you really plan to set up a good holding company, and you are not afraid of the costs of legal services associated with it, then the Netherlands is still a good solution.
What do the Dutch regulations consist in?
You can set up a BV or NV company in the Netherlands. The income tax paid by companies in the Netherlands is 25.8% (CIT in the Netherlands changes practically every year). Holding companies in the Netherlands, in turn, benefit from the so-called participation exemption. The tax exemption will apply to the income of Dutch companies if it is derived from dividends or capital gains and if the source of this income is a so-called qualified investment. This will occur if the Dutch holding company is a shareholder holding of at least 5% of the capital in the subsidiary and if the subsidiary is not a passive investment – and is, for example, an intentional investment in a holding company.
Click to check what exact conditions a holding company in the Netherlands should meet.
The Netherlands has always been an interesting location for people looking for a place to establish a prestigious company which will be well perceived in the international environment. It is chosen for the provision of services by both financial and technological industries as well as trading corporations.
Why are holding companies in Luxembourg so popular today?
In Luxembourg, you can set up a lot of various investment vehicles. It is a country that offers the most extensive legal infrastructure of various funds, holdings and investment companies. Today, Luxembourg offers an alternative to the Dutch holding company, although for investment funds it is exactly the opposite, because in this case the Netherlands outcompetes advanced services in Luxembourg.
Coming back to the topic of the holding company, it can be established in Luxembourg in the form of Sarl or SA company. The capital gains of a holding company in Luxembourg are taxed in the same way as the operating income, namely at the standard CIT rate, i.e., corporate income tax. In a nutshell, the income tax rate in Luxembourg is almost 25%. Luxembourg also has a wealth tax, i.e., an asset tax which is also paid by holding companies.
Luxembourg is popular because it offers many different tax reliefs for financial instruments and holding companies. Both dividends and capital gains earned by a holding company will be exempt from taxation when it benefits from the participation exemption. We deal with a participation exemption when a company in Luxembourg has held at least 10% of shares in a dividend-paying company for a period of one year, or in a company whose shares we plan to sell.
Unique regulations in Luxembourg
Luxembourg has an unusual solution for holding companies. If a company does not hold a 10% stake in the capital of a dividend-paying company, the exemption is still possible as long as it meets certain conditions, i.e., the value of the acquisition of the subsidiary’s shares is at least EUR 1.2 million. Then the dividend on such shares will be exempt from taxation. The same rule applies to profits from the sale of shares (or stocks) of a subsidiary – then the value of the acquisition of these shares should be at least EUR 6 million.
There is another interesting rule in Luxembourg regarding the duration of holding 10% of shares. It is conceivable that one month after the transfer of shares to the holding company in Luxembourg, the sale of the shares will be exempted – provided that the company declares that it will continue to hold at least 10% of the shares in the subsidiary (the one whose shares are sold) for a year.
In practice, it looks like this. You contribute 100% of the shares of the operating company to a company in Luxembourg, then you sell 40 or 80% of the shares of the operating company. Such a transaction may be exempt from tax if you meet additional conditions and if the holding company continues to hold at least 10% of the shares of the operating company for 12 months.
Is Luxembourg a jurisdiction created for holding companies?
The infrastructure for investment funds and financial companies certainly works well there. And not only in the field of good and advanced legal and tax regulations, but also in the field of a very high level of advisory services and financial institutions.
Could Switzerland be the country where you set up your holding company?
Switzerland is perceived as a business-friendly country with low taxes. But is it worth setting up a holding company there? Let us see!
The dividend received by your Swiss investment company will be tax-free in Switzerland provided it is a so-called qualified investment. And this will be the case if the holding company holds at least 10% of the shares in the company paying the dividend and for a period of at least 1 year. Another condition (somewhat modelled after the Luxembourg regulation) is the condition for a minimum share value of at least CHF 1 million.
In the case of capital gains, they will be exempt from taxation in Switzerland if the income is derived from the sale of at least 10% of the shares in the subsidiary and if that shareholding has been maintained for at least one year.
It is true that Switzerland is not a typical location for holding companies. Establishing a company in Switzerland must be very carefully thought out. In Switzerland, for example, there are very high taxes on dividends. On the other hand, the international prestige of this location speaks in favour of using this solution. Technological groups or the medical/pharmaceutical industry take advantage of companies in Switzerland with great success.
The establishment of a foreign holding company in a given tax jurisdiction must have economic and business justification, as well as correspond to the realities of the operations of the entire capital group. Tax issues should not be the only motivation. This is important because the establishment and operation of a holding company in isolation from business aspects may be questioned by the Polish tax authorities. In the event of such a challenge, according to the law dividends and capital gains in Poland may be taxed.
In addition, it is worth remembering that the use of foreign holding companies involves the need to understand and comply with the relevant legal and tax regulations in a given country. In any case, you should consult a lawyer or tax advisor to have a good understanding of the benefits and obligations of creating such a structure.
It is also important that each holding company must have its own substance, i.e., real economic activity and real presence in the country of registration. This is important both for tax exemption, in order for it to apply in the country of the company’s registered office, and for avoiding the risk of CFC tax (i.e., tax on foreign controlled companies) To prevent your operations from being considered illegal tax optimisation. For those who want to read more about this, we recommend that you have a look to the ATAD3 directive.