Restructuring group with overseas holding company

Moreover, it may be that Visitec Corporation itself has subsidiaries in other countries. Careful consideration should be given to transferring the shares in such subsidiaries from Visitec Corporation to Polycon Lens Company Itself, or to a separately formed overseas holding company. The capital gains tax consequences of such transfers must be carefully considered, but if such restructuring may be effected without incurring capital gains tax liability, the elimination of additional withholding taxes on double dividend flows, as well as the direct Corporate taxation in Visitec Corporation, may prove a very considerable saving,

"At some stage during the development of Polycon Lens Company, preferably at the earlier rather than later stages, Mr Holmes may consider it beneficial to form a separate holding company which owns all or some of the subsidiary companies mentioned above. The formation of the holding company, Polycon (Holdings) may be for many reasons perhaps to maximise the dividend flow from a subsidiary to Polycon Lens Company, perhaps to reduce the amount of lost double tax credits resulting from separate ownership of subsidiaries by Polycon lens Company, but growth of Polycon Lens Company may require more sophisticated management functions than may be exercised by Mr. Holmes and his board of directors, and the choice of Country J for the incorporation of a separate overseas holding company is of prime importance.”

Polycon (Holdings) may become the headquarters operation of the Polycon Group and be located in a jurisdiction, which offers special concessions to such holding companies. It may then charge management fees to the various subsidiary companies and increase its after-tax profits provided that the management charges are an allowable deduction against the subsidiaries‘ taxable profits.

Many countries offer special concessions to holding companies in an effort to attract funds distributed by subsidiary companies; such concessions vary from country to country, and may take the form of complete exemption of dividend income, or a partial exemption. The choice of Country J by Mr Holmes will depend on these concessions and their interaction with the domestic tax legislation of Country A.

By diverting dividends into an intermediary holding company, and then distributing one dividend to Polycon Lens Company, low taxed and high taxed profits may be mixed together; this may avoid the additional domestic taxation that may be imposed on low taxed profits if sent direct to Polycon Lens Company, whilst foreign tax credits of high taxed profits are lost. Additionally, if Polycon Lens Company would not be entitled to imputation credits if dividends were remitted direct, the location of Polycon (Holdings) in a jurisdiction where such credits are given through terms of an appropriate double tax treaty will increase after-tax profits.

The choice of location of Polycon (Holdings) will also depend upon the various double tax treaties existing between Country J and the different countries in which the subsidiaries of the Polycon Group are resident. The reductions in withholding taxes on dividends flowing to certain intermediary holding company jurisdictions may be a decisive factor in determining the location of Polycon (Holdings).

Consideration must also be given to the tax consequences of a future sale of shares in any one or more of the subsidiary companies in the Polycon Group, or possible restructuring of the various investments of the group subsequent to change in tax legislation of any of the countries in which group companies are resident. If the consequences of a prospective sale or restructure are high capital gains tax liabilities, then the holding company jurisdiction J may not be the most desirable, even if after-tax income is being maximised. Country J should ideally exempt capital gains on the sale of subsidiary companies' shares from taxation so that the shares may be sold or the group restructured without capital gains tax consequences.

Many countries also subject a foreign parent company to capital gains tax liability if it sells the shares in a domestic company in which it holds a substantial interest, which may often only be 25%. If, for example, Polycon Sales (Europe) is located in a country, which has such legislation, then it should be established that Country J and Country H have an applicable double tax treaty whereby Polycon (Holdings) will be exempted from tax liability in Country G from the sale of shares in Polycon Sales (Europe).

It may be that some of the foreign sales or Manufacturing operations are carried on by a branch of one of the companies within the Polycon Group, rather than as a separate subsidiary company. If it is then intended to incorporate say Branch G into a company, then this should not have adverse tax consequences in respect of any notional capital gain on the transfer of Branch G's assets, either in Country G or in the country of residence of the foreign parent company.

To obtain many of the concessions offered to holding companies, it is normally imperative that Polycon (Holdings) performs real management services within the group otherwise, it may be possible to argue that Polycon (Holdings) is in fact managed, for example, in Country A which may well negate any tax advantages conferred on Polycon (Holdings) through double tax treaty provisions and local tax law.

Date: 2015-01-29; view: 810