Guide to holding company regime
Multinational corporations may decide to form a holding company for a number of reasons. For example, a holding company may be an efficient way to manage a group of subsidiaries in a particular region by centralizing financing, licensing and management activities. Holding companies can also provide tax efficiencies related to dividend withholding and capital gains taxes.
Selecting a suitable location for a holding company is a complex process – involving consideration of commercial, economic, logistical and operational requirements. The tax attributes of the location are also a relevant factor. How will holding company income and gains be taxed and what is the effective tax rate? Are there substance requirements? Are payments from the holding company subject to withholding tax? Does the location have an extensive network of tax treaties?
Pure Equity Holding Company
Pure equity holding companies are subject to a reduced economic substance requirements. The definition of a pure equity holding company refers to a company whose main function is to only hold company equity, and only earn dividends, disposal income, and income arising from the acquisition, holding or sale of such equity. The receipt of incidental interest income (such as interest received on dividend deposits) should not affect the taxpayer's status as a purely equity holding company.
The reduced economic substance requirements are:
• compliance with all applicable registration and filing requirements under the Companies Ordinance, the Limited Partnership Ordinance and the Business Registration Ordinance, etc.;
• carrying out certain economic activities (i.e. holding and managing its equity participation) in Hong Kong either by itself or by another entity; and
• having sufficient human resources and premises to carry out specific economic activities.
For example, a pure equity holding company has only one nominee director in Hong Kong, and holds and manages equity investments outside Hong Kong. In this example, although the company hired a service provider to handle the company registration and filing, it still did not meet the economic substance requirements.
Non-Pure Equity Holding Company
The economic substance requirements are:
• carrying out specified economic activities (i.e. making the necessary strategic decisions and managing and assuming the major risks of any asset it acquires, holds or disposes of) by itself or another entity in Hong Kong;
• employing sufficient number of eligible employees to carry out designated economic activities in Hong Kong; and
• Sufficient amount of operating expenses incurred in Hong Kong.