When businesses expand, they often look beyond national borders. With such an expansion, there are several added advantages for establishing a holding company, which then owns the various group operating companies in different jurisdictions. Various aspects contribute to considering an ideal holding company location, and a brief discussion is outlined below.
Political instability and constant political upheavals cause uncertainty within the jurisdiction and foreign countries that do business with that jurisdiction.
Ease of doing business
This does not specifically refer to actual business done by the company but relates to the associated (support) industries that one may encounter within the jurisdiction. Reputable banking institutions are required for transferring funds and investing capital; and competent service providers who know the industries, laws and practices.
Robust legislative framework
Laws and legal frameworks that allow the broader business plan and its associated structures to function are non-negotiables and the protection of property rights is essential. Beyond this, it is commonplace for many countries to implement (especially tax) laws to the detriment of citizens and resident retroactively. These jurisdictions could be harmful to an estate planning structure.
Ease of doing business with other jurisdictions
Considerations relating to tax- and trade treaty networks, business councils/chambers and foreign-owned company presence is important to ensure that a jurisdiction does not become isolated, and ceases to serve its intended purpose.
Structures and mechanisms to remove risk from the client
Some jurisdictions cater for structures such as trusts or foundations that may remove the inheritance- or capital gains tax burden or forced heirship rules from the business owner’s estate. This minimises tax liability on death, allows for the smooth succession of high-value assets, and ensures that management and control of assets remain central with professionals. Essential estate planning goes hand-in-hand with global expansion.
Substance requirements (laws)
As a requirement of meeting the “compliant” status that is issued by the OECD, jurisdictions have been required to reform and implement “substance laws”. To lay these out shortly, they are essentially a set of laws that ensure that no fraudulent money laundering activities take place through fictitious entities with fictitious members. In terms hereof, any structures that are established are required to meet the substance requirements as follows:
Carry out core income-generating activities in the jurisdiction (depending on which jurisdiction is chosen);
Ensuring that a ‘warm body’ is available to manage structures and that the “post box” effect is eliminated; and
At least a level of expenditure that is proportionate with the investing and management activities of the entity.
Advantageous tax and exchange control laws
A consideration in global expansion is choosing a tax-efficient jurisdiction that has easy-to-comply-with or no exchange control restrictions. These allow for ease in capital deployment, and benefits the owners when profits are derived. Taking advantage of tax-friendly countries to serve global expansion should, however, not be the only consideration.
The above provides only some of the primary considerations for a choice of headquarter location when expanding. It may also be that as part of an expansion, one jurisdiction is more suitable from an estate planning perspective, and another for business purposes, which tends to complicate matters. What is important, though, is a robust framework for the choice of jurisdiction, to ensure that ease of business and expansion efficiency may be possible.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)