Important advantages of a holding company structure include

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A Singapore-based holding company structure provides a number of benefits. Note that several of these benefits apply to holding companies in general but some of them may not be supported by the regulations of specific jurisdictions. The regulatory framework of Singapore enables you to leverage all of the following benefits.

Loss Insulation

Holding companies are insulated from the losses of their subsidiaries; i.e. a holding company isn't liable for acts of a subsidiary if the parent didn't actively participate in, and have control over, the actions of the subsidiary (although there are exceptions for fraud and negligence). Singapore's legal and tax regulatory framework provides full support for such loss insulation. Therefore, if a subsidiary company declares bankruptcy, its creditors cannot legally pursue the holding company. Thus, a holding company is a very good loss insulation strategy. In such a structure, lines of business that have unique risk profiles can be segregated into a separate subsidiary.

Take the example of a fast food restaurant chain. One subsidiary may own the know-how patents, a second may own the real estate assets, a third may own the brand assets, while other subsidiaries can own and operate individual franchises. If there is a fire in one of the franchise restaurants that injures customers, the brand and other assets of the business are protected from that liability. If you set up the individual companies within your holding company correctly, the liability for debts of one won't affect the others.

Tax Optimization

A holding company structure can help lower the overall tax bill of the business if the individual subsidiaries are established with an eye on the tax impact on the overall business. Strategies that can be used to achieve tax reduction include use of double-tax treaties across jurisdictions; reduction or deferral of personal taxes of owners; avoiding capital gain taxes; avoiding taxes on dividends, interests, and royalties; leveraging tax incentives by aligning subsidiary mission with incentives; and use of retained earnings across subsidiaries in a tax-optimized manner.

The individual subsidiaries file their own tax returns and the return is consolidated at the level of the parent. A properly-designed structure can depress the overall tax liability of the holding company by locating each subsidiary in a jurisdiction that provides most tax benefits for its line of business. Furthermore, the losses of one entity can be used to offset profits from another. The group may also be able to use intra-group financing strategies — for instance, lending retained earnings of a profit-making subsidiary to another subsidiary that is in a growth mode — to achieve better tax outcomes.

On this front, Singapore provides a particularly suitable jurisdiction. Some of the tax benefits available in Singapore for your holding company are described below.

Single-Tier Corporate Tax System

Singapore has a single-tier or full imputation tax system — corporate profits are only taxed once. Consequently, Singapore does not impose any tax on dividends from the subsidiary to the Singapore parent company and there is no withholding tax when dividends are distributed either to residents or to non-residents. Similarly, interest paid by a subsidiary to the parent is also not subject to withholding tax and is treated as a pre-tax expense. However royalties and certain technical service fees paid to foreign corporations may be subject to a 10% and 17% tax, respectively, if no exemption applies and the tax rate is not reduced under a tax treaty. But judicious structuring of corporate entities may achieve optimization of these taxes as well.

Tax Exemption of Foreign-Sourced Income

Dividends received from your holding’s foreign subsidiaries may be exempted from corporate tax provided that the ‘subject to tax’ and the ‘foreign headline tax rate’ conditions are met — in summary these conditions require that the subsidiary’s profits should “theoretically” be taxed at least at 15% in the subsidiary’s country of domicile; no actual payment to the subsidiary’s country of domicile is required e.g. due to exemptions or incentives.

Consequently, dividends from tax-neutral or low-tax jurisdictions may be taxed in Singapore when distributed to the parent company. Besides, as of now Singapore has no controlled foreign company rules — undistributed income of foreign subsidiaries may not be subject to tax. Once again, these provisions can be used to assemble an international corporate holding structure that can dramatically reduce — and in some cases entirely eliminate — the structure’s overall tax burden.

No Capital Gains Tax

Furthermore, Singapore does not have any capital gains tax and there is no transfer tax on the sale of shares. As a result, asset or subsidiary sale by the parent is not a taxable event at either the subsidiary level or the holding company level. However, if capital gains constitute the main source of company’s income and the holding period of the sold asset is relatively short, they may be treated as ordinary income and be subject to income tax. Note that as capital gains are not taxed, capital losses are generally non-tax deductible.

Tax Incentives for IP Holdings

Singapore offers several tax incentives for IP holdings. The IP Development Incentive (IDI) scheme implies concessionary tax rates of 5% or 10% to qualifying royalty and other IP income until 2023 provided there has been a certain level of expenditure, jobs created and other economic commitments within Singapore. Furthermore, you may apply for deductions for qualifying expenditure incurred for Research and Development activities, IP Registration, and Licensing.

Tax Agreements Benefits

Singapore has concluded Double Taxation Agreements (DTAs) with over 80 countries. This means that by availing the provisions of DTAs, dividends, interests, and royalties paid to Singapore resident holdings from subsidiary companies located in the treaty countries may be subject to reduced rates or may even be entirely exempt from withholding tax obligations.

However note, that the tax benefits under the DTAs are available only if the Singapore holding is considered a tax resident in Singapore. Singapore Tax Residency is generally assessed through the ‘control and management’ test. This means that the entity is considered to be a resident if strategic decisions are made in and control and management is exercised in Singapore. For this purpose, the salient determining factor is the place where the Board meetings are held. However, for foreign-owned investment holding companies that might not be enough, as explained below.

As a general rule, foreign-owned holding companies are treated as non-residents. To be considered a tax resident, the company will need to apply to the Inland Revenue Authority of Singapore (IRAS) and obtain a Certificate of Residence (COR), which may need to be submitted to the relevant foreign tax authorities to claim tax treaty benefits. Note that a foreign jurisdiction can still deny access to tax reliefs even if a COR is submitted.

When granting a COR, the IRAS will look at a combination of the following factors:

• Whether the control and management is exercised in Singapore — e.g. are the Board of Directors meetings held in Singapore?;
• Whether there are valid reasons for setting up a holding company in Singapore;
• Whether the company receives administrative services from a Singaporean company;
• Whether the company has related entities doing business in Singapore;
• Whether the company has an executive director (not a nominee) and a C-level employee based in Singapore, etc.

Transfer Pricing Issues

With respect to intra-group transactions, Singapore law requires that these should be executed according to the “arm’s length principle”. It means that prices of transactions between related parties should be equivalent to prices that unrelated parties would have charged in similar circumstances. Companies with gross revenue over SGD 10 million may have to submit transfer pricing documentation on transactions with related parties exceeding certain thresholds, if requested by IRAS to do so. More information on Singapore Transfer Pricing regulations can be found in this guide.

Country-by-Country Reports

Singaporean Ultimate Parent Entities (UPE) of large multinational companies with consolidated group revenue of S$ 1.125 billion or more also need to file a Country-by-Country report which includes key information about revenue, tax paid and accrued, employment, capital, retained earnings, tangible assets, and business activities of the parent company and subsidiaries.

All these regulations make Singapore a safe and advantageous location for setting up your holding company. However, note that It is important to design the holding structure carefully so that it is not seen as a pure tax avoidance scheme; there must be economic rationale and commercial reasons to justify the structure. Otherwise, the anti-avoidance regulations for transfer pricing, thin capitalization, and interest deductibility limitations may come into play. Inter-company transactions should be conducted at arm’s length and should be properly documented and reported. A good corporate services partner can help design your corporate structure for tax optimization and can ensure that it continues to meet the compliance obligations in Singapore.

No Limitations on the Domicile of Assets

Singapore holding companies have no limitations on the domicile of assets owned by such companies. The subsidiaries of a Singapore holding can be based in Singapore or in any foreign country; this provides excellent flexibility for such a structure.

Government Incentives

Singapore offers special government incentives such as the Finance & Treasury Centre (FTC) Incentive, Global Trader Programme, Pioneer Certificate Incentive & Development and Expansion Incentive, etc., for certain holding companies in Singapore (often referred to as the Headquarter Incentives).

Favourable Accounting Regulations

Singapore holding companies enjoy special accounting treatment for consolidated books, whereby losses from one subsidiary can offset gains from another. A favorable accounting regime for the passive income of a Singapore holding company is also available. In addition, specialized regulations generally simplify the compliance framework for holding companies, such as the Financial Holding Companies Act.

Asset Protection

By transferring the ownership of valuable assets (such as patents, trademarks, IP, etc.) into a separate subsidiary, a holding company can provide protection for those assets from frivolous legal attacks. Such a structure also enables the business to buy and sell these patent portfolios easily.

Holding companies when used by a high net worth individual, let individuals protect their personal assets, because those assets are technically held by the corporation, and not by the person, who is consequently shielded from debt liabilities, lawsuits, and other risks.

Asset Transactions

Segregation of assets in separate subsidiaries makes it easier to transact those assets. You can sell the subsidiary as a separate unit without having to restructure your business or engage in complicated accounting review and audits to convince the potential buyers about the value of the entity since its accounts are already managed separately. This is an important benefits of such a structure; acquisition and disposal of assets becomes markedly easier if the assets are held in a subsidiary.

Intergenerational Asset Transfers

The parent company can also be used for  succession planning purposes. Such a transfer can provide tax deferral while ensuring that the whole estate easily transfers as a single unit to the next generation. Singapore's regulatory framework is particularly favorable for trust structures that include holding companies. A holding company provides the following advantages for intergenerational wealth transfers:

• Clear governance rules for family wealth can be established and consistently implemented.
• Diverse assets that may reside in multiple countries can be transferred as a single unit.
• Risk management, asset protection, and wealth preservation can be outsourced to professional manager through a single point of delegation.
• A coherent intergenerational strategy can be developed that integrates asset holdings with other tools such as wills, family office, foundations, residence jurisdiction selection, and lasting Power of Attorney.

Risk Reduction and Financing

By decoupling the failure probabilities of individual subsidiaries, a holding company structure dramatically reduces the probability of a systemic failure of the whole business. As a result, it lowers the risk of the overall business and hence reduces its cost of capital.  The holding company can obtain better financing terms than what it would have obtained under a single company structure. Furthermore, holding companies can provide downstream guarantee for a subsidiary to get better financing terms for a subsidiary's projects thereby reducing the cost of capital for the subsidiary.

A holding company structure can be designed to isolate capital intensive subsidiaries (who may have significant indebtedness) from the operating subsidiaries. If the indebted subsidiary fails, its troubles do not carry over to the other parts of the overall business which can continue to operate. Bankers realize this benefit and reward it by offering lower cost of capital for the overall business.

Centralized and Consistent Control

Usually, the owners of the business control the holding company and the subsidiary companies through the board of directors. This enables a centralized coordination of the strategy of individual businesses while providing them the flexibility to operate independently. A holding company structure can also be used to ensure consistent ownership and governance policies across subsidiaries. For example, new investors in a business may insist that all patents and IP assets of the business are owned under a single subsidiary so that they can be transparently managed.

Confidentiality

By insulating the owners from the day to day operations of a subsidiary, owners can maintain secrecy or confidentiality about their participation or their strategy.

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