Types of International Company Structures
Establishing an Overseas presence
There are a number of options that allow a company to establish overseas presence and move into international markets. These include:
- Forming a subsidiary company fully or partly owned by the corporation.
- Forming a branch of the company overseas.
- Through a distributor, an agent, an associate or a representative office.
- Through a joint venture or other forms of partnership.
- Trough franchising or licensing.
- By moving its manufacturing plant overseas.
It is vital to choose the right method when moving internationally, whether it is by incorporating a new entity or by choosing an appropriate business relationship with partners, associates, agents, distributors, licensees or franchisees. This method must not only fit the particular company’s needs, but it must also meet the market or economic goals placed upon making the international move. Therefore, before making such a move it is imperative to take particular account of the legal and tax implications, both in the offshore market and at home. Moving overseas must also fit the prevailing market and taxation conditions in the offshore jurisdiction targeted and comply with its laws and regulations.
The holding company (HC) structure
A holding company (HC) is incorporated to accomplish the following functions in a company group.
- Ownership of the assets in both operating and non-operating group companies.
- Ownership of interest in participation in both operating and non-operating group companies.
- Accumulation of shareholder equity.
- Accumulation of capital.
- Dividend funnelling from operating companies.
- Consolidation of management and administration e.g. consolidation of financial statements, payroll, allocation of funds etc.
- Asset protection.
- Reduction of risks from financial, tax, and mismanagement couses.
- Distribution of profits and payment of dividends to shareholders.
- Reinvesting capital by financing new projects via existing group companies or through new group companies and joint ventures.
- Investing capital in equity funds, stock or other forms or investment.
A significant concern in any international corporate structure is the location of the holding company. The choice of jurisdiction for the holding company of a corporate group is related to:
- Tax optimisation e.g. tax exposure charged on income e.g. profit/dividends or gains e.g. capital gains.
- Maximisation of saving, which is interlinked to tax optimisation by deciding what particular saving, gain, share and interest should be allocated throughout the group.
- Market and commercial reasons such as:
- Labour costs.
- Proximity to markets.
- Legal and regulatory regime.
- Access to international equity and debt capital markets where it is important to be present in a credible white list jurisdiction.
- Envisaged private equity investment e.g. which jurisdiction would a potential investor be more comfortable in participating.
- Envisaged trade sale.
- Management and administration reasons.
Therefore, the location of the HC is a significant aspect of concern in an international corporate structure. There is not just one all-embracing optimal HC jurisdiction for investors or investment profiles. A number of tax and commercial parameters should be considered by investors before making their final decision on the location of their HC such as:
Tax parameters:
- Whether the HC jurisdiction allows moving foreign-sourced dividends at low or zero foreign withholding tax rates. This must also take into account the benefits of the jurisdiction’s double taxation treaties because this shall ultimately reduce foreign withholding tax.
- Whether the HC jurisdiction allows foreign-sourced dividends received by the HC to be taxed at low or zero corporation taxes and are not subsequently highly taxed in the HC jurisdiction.
- Whether the HC jurisdiction allows profits to be distributed to non-resident shareholders at low or zero withholding dividend tax rates.
- Whether the HC jurisdiction allows for the receipt of capital gains from the sale of shares in foreign companies, at low or zero withholding tax rates in both the foreign and its domestic tax irrespective of share-holding period and shareholder percentage.
- Whether the HC jurisdiction allows liquidation of the HC itself at low or zero withholding tax or capital gains tax rates.
Commercial parameters:
- How accessible is the HC jurisdiction e.g. infrastructure, location, language spoken etc.
- Whether the HC jurisdiction allows free movement of capital, services, goods and labour.
- The currency used at the HC jurisdiction.
- Management, administration, establishment, rental, labour and professional costs at the HC jurisdiction.
- The stability of the HC jurisdiction.
HC company structures that use Cypriot entities are explained here.
Having said the above, in structures where the HC is established in a low tax jurisdiction whereas the subsidiaries are located in high tax jurisdiction, then “substance” becomes a vital parameter. Some countries apply anti-abuse provisions in their tax legislation, especially after the initiation of OECD’s “base erosion and profit shifting project” (BEPS). These provision aim to combat the use of tax-driven channel companies and the phenomenon of treaty shopping with a purpose of avoiding withholding tax on dividend payments. Therefore a HC should ideally have local working offices, with physical presence. They must also employ local staff and directors that can prove that they have knowledge and expertise in the activities the set up and administration of the company group and actually partake in the decision-making process explained here.
Other Popular Company Structures:
There are many other types of popular company structures each of which serves a particular need or purpose in the international group of companies. These include but are not limited to:
- The non-resident company (NRC) structure, explained here.
- The financing company (FC) structure explained here
- The intellectual property (IP) or Royalty Income (RI) company structure explained here.
- Special purpose vehicle (SPV) company structure.
- Real estate (RE) company structures explained here
- Collective investment fund (CIF) structure.
- Public company scheme (PC) structure.
- International Trust (IT) Structure explaned here
- Trading Company (TC) Structure (in goods or securities).
- Employment company (EC) structure.
- Shipping company (SC) structure.
- Management and Service-Providing (M&SC) company structure.
We have given an extensive explanation of the HC structure above and upon request we can also take you through various other options available to international clients. Some of the above types of company structures that use Cypriot entities are explained here.