Tax Saving by International Holding

The overall effective tax rate of a U.S. multinational corporation may have significant impact on the value of

its stock. Therefore, it is very important for U.S. multinationals to explore and implement tax planning

strategies to reduce their global tax rate. A key objective of global tax minimization planning is to allow a

multinational to defer U.S. tax on its foreign profits and eventually repatriate such profits in a tax‐efficient

manner.

Basic Offshore Holding Company Structure

Traditional Corporate Structure

It is common to see a multinational corporate structure in which operating subsidiaries ("Opcos") are directly

owned by the U.S. parent corporation or some other U.S. corporation in the U.S. multinational group.

The “traditional" corporate structure is illustrated in Figure 1.

The traditional structure, however, is not tax efficient, particularly when (1) there is a need to transfer cash

from one Opco to another Opco; (2) an Opco is sold and the profits are to be reinvested outside the United

States; or (3) profits are repatriated to the United States. Under the traditional structure, in order to move

cash from one Opco to another, it is necessary first to transfer the cash to the parent as a dividend, after

which the parent transfers the cash to the cash‐poor Opco. This distribution needlessly results in U.S. tax to

the parent on the receipt of the dividend and may also result in greater withholding tax imposed by the

country from which the cash originates. The traditional structure is also tax inefficient on exit. If stock of a

directly held Opco is sold by its U.S. parent for cash, there will be immediate taxation to the U.S. parent without

the ability to reinvest the before‐tax proceeds outside the United States. Finally, when profits are repatriated

to the United States, the traditional structure may result in increased dividend withholding taxes,

which in many cases may be 20 percent or higher, unless reduced by an income tax treaty.

Holding Company Structure

The three weaknesses of the traditional structure can often be remedied through the use of a holding company.

Under this structure, the foreign Opcos, instead of being held directly by the U.S. parent, are owned by

a single holding company which is incorporated in an appropriate jurisdiction and which is itself owned by

the U.S. parent (as shown in Figure 2 on the next page).

Using this structure, cash can be transferred from one Opco to the holding company, and then by the holding

company to another Opco, without ever becoming taxable to the U.S. parent. If the right jurisdiction is used,

tax on the payment and receipt of the dividend can be minimized or eliminated.

Upon sale of an Opco, the sale proceeds can, if desired, be reinvested abroad without ever becoming

subject to U.S. tax. Finally, upon repatriation, U.S. tax cannot be avoided. However, careful choice of a

holding company jurisdiction can result in foreign withholding taxes which are significantly less than would

be imposed on a direct distribution from an Opco to the U.S. parent.

Choice of Jurisdiction

The key to choosing a jurisdiction in which to incorporate a holding company is to use a jurisdiction which

(1) has treaty relationships that minimize or eliminate withholding tax on dividends paid by the Opcos, (2)

imposes little or no tax on the receipt of dividends and capital gains, and (3) imposes little or no withholding

tax on dividends paid to its U.S. parent. A few of the jurisdictions where holding companies are currently

commonly incorporated are Luxembourg, Cyprus, the Netherlands and, for Asian operations, Singapore and

Hong Kong. Of these popular jurisdictions, in the recent past Luxembourg has often been favored to hold

European operations since it is a respectable jurisdiction, and has a wide treaty network and an established

ruling policy where a favorable ruling can usually be secured so that the receipt of dividends and capital

gains is exempt from Luxembourg tax. While Luxembourg imposes a 20‐percent withholding tax on dividends

paid to a U.S. parent, there are techniques which can be used to avoid this tax. For example, a liquidating

distribution, rather than a dividend in the ordinary course, avoids withholding tax. There is also a special

type of instrument referred to as a "preferred equity certificate" (PEC) which is treated as debt for Luxembourg

purposes but is usually treated as equity for U.S. tax purposes. For Luxembourg tax purposes, distributions

on a PEC are thus treated as interest, which is not subject to withholding tax. A third alternative is to

have the U.S. parent establish a Luxembourg branch. This can usually be done by the U.S. parent forming a

Luxembourg partnership to hold the offshore Luxembourg holding company. Distributions by a Luxembourg

company to a Luxembourg partnership are not subject to withholding tax, nor are they taxable in the

hands of the partnership.

Given the recent protocol (effective 02/01/2005) amending the U.S.‐Netherlands Income Tax Treaty, which

provides for zero withholding on dividends paid to a U.S. corporation that owns at least 80 percent of the

stock of a Dutch company, the Netherlands is becoming a more popular jurisdiction to use for the basic holding

company.

Subpart F Considerations

Generally, passive income in the nature of dividends, interest, royalties and certain capital gains is included

in the income of a U.S. shareholder of a controlled foreign corporation even though it has not been distributed

to such U.S. shareholder. Application of these rules would largely defeat the whole purpose of the offshore

holding company structure since dividends paid by Opcos, and capital gains on sale of an Opco, would

immediately be subject to U.S. tax as a result of the subpart F rules. The simple way to avoid this result is to

have each Opco make a "check‐the‐box" election (by filing Form 8832) to be treated as a disregarded entity

for U.S. tax purposes. In this case, the payment of dividends from an Opco to the holding company will be

disregarded for U.S. tax purposes and will therefore not be treated as subpart F income. Moreover, the sale

of the stock of an Opco would be treated as a sale of the underlying assets, which generally would not be

subject to the subpart F rules.

Consequences of Implementation

The tax costs of implementing the basic offshore holding company structure can usually be managed so that

there are little, if any, tax costs involved. If the offshore holding company is established at the outset of expansion

into foreign markets by the U.S. corporation, there should be no tax cost at all since, in this case, a

U.S. corporation would not be transferring appreciated assets outside the United States.

If the U.S. multinational has operated for years with the traditional structure, then the transaction can

still usually be structured so that the movement of the Opcos into the offshore holding company is a tax‐free

reorganization for U.S. tax purposes. Such a transaction would be structured as follows. The U.S.

corporation would form the holding company in the desired jurisdiction. The stock of each Opco would then

be transferred to the holding company and check‐the‐box elections would be made for each Opco. Under the

step‐transaction doctrine, the transfers should be treated as Type D reorganizations under Code Se. 368.

Because the transaction would be treated as a tax‐free asset reorganization of one foreign corporation into

another with the same U.S. shareholder, there should be no adverse implications under Code Sec. 367 and

no requirement to execute a gain recognition agreement. It is possible that there could be capital duty taxes

in the jurisdiction of the holding company, but often these taxes can be avoided or minimized with proper

planning. For example, Luxembourg has a one‐percent capital duty tax that applies to capital contributed to

a Luxembourg company; however, there is generally an exception where the capital consists of shares in a

company incorporated in the EU. Other approaches, such as capitalizing the holding company with debt,

may also be used to minimize or avoid the capital duty taxes.

Offshore Intellectual Property Holding Company

In addition to the basic holding company structure, a multinational with valuable intellectual property used

in its foreign operations should consider the possibility of transferring some or all of such property to a

separate intellectual property offshore holding company ("IPCo") formed in a low‐tax jurisdiction. The IPCo

is generally owned by the overall foreign holding company. The intellectual property is then licensed to the

various Opcos in exchange for an arm’s‐length royalty. This produces royalty deductions in the high‐tax

Opco jurisdictions and royalty income to the low‐tax IPCo. A critical aspect of achieving the desired benefit

under the IPCo structure is the ability to support the amount of the royalty payment to the IPCo. Local transfer

pricing rules must therefore be analyzed to make this determination. In this connection, it is often advisable

to commission a transfer pricing study. Of course, a cost‐benefit analysis should always be undertaken

to determine if this structure is appropriate for a particular multinational.

→ To illustrate the potential bene������it of this structure, assume that a U.S. telecommunications company has a

subsidiary in the United Kingdom ("UKCo") which owns valuable software that it uses in its U.K. operation

poses. The U.K. tax rate is 30 percent and UKCo earns $200 a year in net profit, resulting in a U.K. tax burden

of $60 annually. Assume that Luxco forms an IPCo located in Switzerland and UKCo transfers the software to

Switzerland, where a ruling is obtained for a tax rate of eight percent. Swiss IPCo licenses the software to

UKCo in exchange for an arm’s‐length royalty. There are no royalty withholding taxes under the provisions

of the Swiss‐UK Tax Treaty. If the appropriate royalty (taking into account the specific nature of the software

and transfer pricing rules in the U.K.) is $100 per year, the annual taxable profits of UKCo are reduced

by $100, reducing the annual U.K. tax by $30. The Swiss tax cost is $8 per year, resulting in a net tax savings

of $22 annually. This structure is illustrated in Figure 3.

Choosing a Jurisdiction

In choosing a jurisdiction in which to incorporate an IPCo, there are basically three considerations. First,

the Opcos must be able to pay the royalties to the IPCo with little or no withholding tax. If the jurisdictions in

which the Opcos are located impose significant withholding taxes on royalties, then a favorable treaty between

the two jurisdictions is required. Second, IPCo must be subject to little or no tax on the royalties received.

Finally, it is beneficial to choose a jurisdiction from which dividends can be distributed by the IPCo to

its shareholder (the foreign holding company) without significant withholding taxes on dividends. This is a

function of the internal law of the IPCo jurisdiction, as well as its treaty (if any) with the holding company

jurisdiction. Often, favored jurisdictions in which to incorporate an IPCo are Switzerland and Ireland. Switzerland

offers a ruling process in the local Cantons where the tax rate can be negotiated and applicable for a

specific term of years. It may be possible to obtain a tax ruling from the Swiss government with effective

rates as low as approximately four to eight percent. For example, in the Canton of Zug, the ruling practice

may allow an eight‐percent rate, which can then be reduced by 50 percent. This is done by applying a so

called 50‐50 method of taxation, under which approximately 50 percent of the Swiss company’s profits can

be paid to a related company formed in a no‐tax jurisdiction and deducted from the Swiss tax base. The result

is an effective tax rate of four percent. Ireland, on the other hand, simply has a fixed corporate tax rate of

12.5 percent on all profits (whether royalties or from operations). Both Switzerland and Ireland have many

favorable tax treaties, but Switzerland has a much larger treaty network. Thus, purely from a tax standpoint,

Switzerland is likely to be the favored jurisdiction.

Tax Costs of Implementation

As illustrated above, in order to implement this structure, intellectual property must be moved from where

ever it currently resides into the IPCo. Intellectual property located offshore must be transferred, either by

sale or contribution, to the IPCo, and there may be a tax cost of doing so (i.e., any gain may be recognized

and taxed in the local operating countries). Nonetheless, in the authors’ experiences, the future tax savings

often outweigh the current costs. In the case of intellectual property owned initially in the United States, it

should generally be sold to the IPCo (or transferred in a transaction which does not otherwise qualify for

nonrecognition under Code Sec. 351. The reason is that, if intangible property is transferred offshore in a

transaction that qualifies under Code Sec. 351, Code Sec. 367(d) results in deemed royalty income to the U.S.

transferor for up to 20 years following the transfer (thus effectively negating the benefits of the structure).

On the other hand, if the transfer is taxable, it results in a one‐time tax to the transferor, based on the gain

inherent in the property at the time of the transfer. If losses are available to shelter this one‐time gain, it

may be possible to achieve the desired results without immediate tax cost.

Another approach to transferring intellectual property abroad is to have the U.S. parent and the IPCo enter

into a cost‐sharing arrangement. Cost sharing arrangements are used when the intellectual property is used

by more than one company and is subject to future development. Under a cost‐sharing agreement, each

party to the agreement makes a buy‐in payment to purchase an interest in the existing intellectual property.

Thereafter, the parties share the costs of future development. The parties to a cost‐sharing arrangement

become the joint owners of all the intellectual property subject to the cost‐sharing agreement, and, hence,

each can use the intellectual property without having to pay a royalty. This approach allows the IPCo to acquire

an interest in the intellectual property (which it then can license to the OPCos), while the U.S. parent

retains the right to use the intellectual property without paying a royalty. Thus, where the intellectual property

is used both within and without the United States, a cost‐sharing arrangement allows an IPCo structure

to be implemented in such a way that royalties attributable to foreign use can escape the U.S. tax net altogether,

without creating subpart F income from the U.S. use.

Offshore Manufacturing and Distribution Companies

A U.S. multinational that is a manufacturer or distributor may also want to consider an offshore holding

company structure with a manufacturing or distribution company located in a low‐tax jurisdiction. To be of

benefit, the U.S. multinational should have significant offshore sales. This structure can be implemented in

conjunction with an IPCo or on a stand‐alone basis. Here is how the manufacturing structure works: A newly

incorporated manufacturing company ("Manufaco") is incorporated in a low‐tax jurisdiction and is placed

under the basic offshore holding company. Manufaco contracts with the Opco or Opcos in the group that had

historically done the manufacturing to manufacture the products on its behalf. Manufaco maintains control

of the manufacturing process, has title to the finished and unfinished products, and bears all of the risk associated

with the inventory. An arm’s‐length fee is paid by Manufaco to the Opco for its manufacturing services.

Manufaco then sells the finished product to the end user or uses a related distributor to sell the product.

Because Manufaco carries the cost of maintaining inventory (both raw materials and finished

goods) and bears the risks associated with the inventory, it should be possible to justify a price for the Opcos’ services which leaves a significant profit component in Manufaco With respect to that profit element, the spread between the tax rate in Manufaco’s jurisdiction and that in which the Opco is located represents the tax savings. The manufacturing structure is illustrated in  Figure 4.

Using this structure, savings are possible even though the historic Opco manufacturer never

moves the place of its historic manufacturing operations. However, in some jurisdictions, additional sav ings may be achieved if the location of the actual manufacturing operations is moved to economic development

areas which offer lower or zero rates of taxation, but this will require that a significant portion of the

employees and operations be moved to such an area in this jurisdiction. If the actual manufacturing operations

are not moved, some substance, such as management control and oversight, may be required in Manufaco

in order to make the overall structure work. In addition, whether or not the situs of the plant is moved,

appropriate transfer pricing is critical to the success of this structure. It is recommended that a local transfer

pricing study be undertaken.

Here is an example of how the structure works: assume that Manufaco is formed in Switzerland and the

historic manufacturing operations are in Italy. Swiss Manufaco pays a 20‐percent commission to an Italian

Opco to do the manufacturing. The Swiss negotiated tax rate is eight percent and the Italian tax rate is 50

percent. Assume there is a profit of $1,000. The Swiss Manufaco would earn $800 and the Italian Opco

would be paid $200. The effective tax rate on such profits is 16.4 percent compared to an effective tax rate of

50 percent under the old structure, resulting in a net tax saving of $268.80. A company that is not a manufacturer,

but rather is purely a distributor, could use a similar arrangement. In this case, a separate distributing

company ("Distribco") could be incorporated in a low‐tax jurisdiction to purchase the product from an

unrelated supplier and resell it to the end user. Local companies, acting as agents for the Distribco, would

perform sales and possibly purchasing functions in the countries where sales and purchases are made, and

would receive an arm‘s‐length commission for its services. The profit in the Distribco (attributable to Distribco

taking the risks of ownership of the merchandise) would be taxed at a low rate in Distribco’s jurisdiction.

Subpart F Issues

The subpart F issues in connection with the Manufaco and Distribco structures must not be overlooked. Due

to the interplay of the foreign base company sales income ("FBCSI") rules and the branch rules), making a

check‐the‐box election to treat Manufaco or Distribco and the Opcos as disregarded entities will not necessarily

avoid subpart F. Subpart F income includes FBCSI. FBCSI, in relevant part, is income derived in connection

with (1) the purchase of personal property from a related person and its sale to any person, or (2)

the sale of personal property on behalf of a related person. Checking the box for Manufaco and each Opco

means that such corporations do not exist in the eyes of the U.S. tax law, and, therefore, any transactions

between such companies are ignored. However, under the branch rule, a "branch" (including a disregarded

entity) may, in some cases, be treated as a separate corporation for purposes of applying the definition of

foreign base company sales income. If the branch rule applies to treat the Opco that Manufaco hires to assemble

or produce the finished goods as a separate corporation, Manufaco could be treated as having sold

such goods on behalf of the related Opco or as having purchased such goods from such related party.

Although there may be some uncertainty as to the precise application of the branch rule, the branch rule

should not result in a problem so long as Manufaco is treated as the manufacturer of the goods that it commissions

the local Opco to assemble or produce (i.e., if it is possible to attribute the activities of Opco to the

Manufaco). If Manufaco is so treated, it will be treated as having sold property that it manufactured and

hence will have no FBCSI. While the IRS’s position is that such attribution is not possible, there is a strong

position that, with the appropriate structure in place, attribution should be appropriate. In the Distribco

structure, even if Distribco is treated as a separate corporation under the branch rule, so long as Distribco

buys the goods from an unrelated party and sells to an unrelated party, the gain should not be subpart F income.

One further planning opportunity to ensure that Distribco is not subject to the branch rule is to interpose

a company located in a no‐tax jurisdiction (i.e., Cayman, BVI or a similar jurisdiction) between Holdco

and the U.S. parent. This typically would avoid the treatment of a branch as a separate corporation.

Conclusion

For many companies with operations throughout the world, careful design of the corporate structure,

including the use of an offshore holding company, can result in a meaningful worldwide tax savings. In

appropriate cases, additional savings can be generated by using separate holding companies for intellectual

property and manufacturing or distribution functions. Of course, careful attention must be paid to the choice

of jurisdiction for the holding company or companies, appropriate transfer pricing methodology, avoidance

of subpart F income and minimizing the initial tax cost of putting such a structure into place.

REPATRIATION AND EXIT PLANNING USING OFFSHORE HOLDING COMPANIES

Below is a more detailed look at particular jurisdictions which may be useful for establishing an offshore

holding company for these purposes. Also addressed are other uses for offshore holding companies, such as

planning to take advantage of the 15‐percent maximum rate on certain dividends received by Noncorporate

taxpayers as well as use of holding companies for inbound investment.

Summary of Basic Holding Company Structure

As mentioned above, under the basic holding company structure, foreign operating subsidiaries, instead of

being held directly by the U.S. parent, are owned by a single holding company that is incorporated in an appropriate

jurisdiction and that is itself owned by the U.S. parent. Check‐the‐box elections are made to treat

each operating subsidiary as a "disregarded entity" for U.S. tax purposes. This avoids subpart F issues resulting

from transactions between operating subsidiaries or between an operating subsidiary and the holding

company. The principal benefits of this structure are that (1) operating income, or proceeds from the sale of

an operating subsidiary, can, if desired, be reinvested abroad without ever becoming subject to U.S. tax; and

(2) upon repatriation, although U.S. tax cannot be avoided, careful choice of a holding company jurisdiction

can minimize foreign withholding taxes.

General Considerations

The key to choosing a jurisdiction in which to incorporate a holding company is to use a jurisdiction that (1)

has treaty relationships that minimize or eliminate withholding tax on dividends paid by the operating subsidiaries;

(2) imposes little or no tax on the receipt of dividends and capital gains; and (3) imposes little or

no withholding tax on dividends paid to its U.S. parent. The appropriate jurisdiction for the centralized holding

company may depend on where the multinational does business. It may also be necessary to interpose

additional holding companies between the overall foreign holding company and one or more operating subsidiaries

to take advantage of favorable tax treaties. For example, if the multinational is U.S. based and does

business largely in Europe, a European holding company may be appropriate. Alternatively, where the multinational

is based in Europe and also has operations in Asia and Latin America, it may be necessary to have

a European holding company as the centralized holding company with the European subsidiaries being

owned directly and a separate holding company under the centralized holding company to hold the Asian

and/or Latin American subsidiaries. Below is a brief discussion of some of the favorable holding company

jurisdictions that a multinational should consider and that may be appropriate depending on the type of

business of the multinational, its objectives and where it operates.

JURISDICTIONAL SURVEY

Luxembourg

In the recent past, Luxembourg has often been favored to hold European operations since it has a wide

treaty network and an established ruling policy under which a ruling can usually be secured that the receipt

of dividends and capital gains is exempt from Luxembourg tax. As mentioned above, one disadvantage of

Luxembourg is that it imposes a 20‐percent withholding tax on dividends paid to a U.S. parent. However,

there are techniques that can avoid this tax. For example, a liquidating distribution, rather than an ordinary

dividend, is not subject to withholding tax. There is also a special type of instrument, referred to as a

"preferred equity certificate" (PEC) that is treated as debt for Luxembourg purposes but is usually treated as

equity for U.S. tax purposes. For Luxembourg tax purposes, distributions on a PEC are thus treated as interest,

which is not subject to withholding tax. A third alternative is to have the U.S. parent establish a Luxembourg

branch. This can usually be done by the U.S. parent forming a Luxembourg partnership to hold the

offshore Luxembourg holding company. Distributions by a Luxembourg company to a Luxembourg partnership

are not subject to withholding tax, nor are they taxable in the hands of the partnership.

In general, the Luxembourg company must hold the operating company stock for at least one year, and the

operating subsidiary must be subject to tax in its home jurisdiction, in order for dividends received by a Luxembourg

holding company from an operating subsidiary, and capital gain on disposition of such operating

company stock, to be exempt. Dividends may be distributed during the one‐year period so long as the stock

of the operating subsidiary is held for the full one‐year period.

One overall advantage to using Luxembourg is that it is a generally "respected" jurisdiction and the tax authorities

around the world (particularly in Europe) are generally comfortable with it. For example, Switzerland

imposes a 35‐percent withholding tax on dividends paid to non‐Swiss shareholders. Under the Swiss/

Luxembourg tax treaty, this tax is reduced to zero. However, like many Swiss treaties, the treaty contains an

anti‐abuse provision that allows Switzerland to deny benefits of the treaty. In our experience, the Swiss tax

authorities are less likely to invoke the anti‐abuse provision to deny the benefits of the treaty on a distribution

to a Luxembourg parent; this is not the case for other jurisdictions with similar treaties (for example,

Cyprus).

Cyprus

From a pure tax perspective, Cyprus is probably one of the best jurisdictions to use for a holding company

for European subsidiaries. Pursuant to the EU parent‐subsidiary directive, dividends distributed from an EU

subsidiary to Cyprus will generally not be subject to a withholding tax. Cyprus has no dividend withholding

tax on outgoing dividends so that no special tax planning or treaty is required to take money out of Cyprus.

Dividends and capital gains are exempt in the hands of a Cyprus company, provided that either (1) the underlying

operating subsidiary's income is subject to a tax rate of approximately five percent, or (2) such subsidiary

has an active business, and, in either case, the Cyprus company owns at least one percent of the stock

of the operating company. Thus, assuming a subsidiary is sufficiently active, there is no requirement that it

be subject to tax, as is the case for Luxembourg or the Netherlands (as described below). Despite its tax advantages,

some multinationals are not altogether comfortable with Cyprus. Until recently, many countries

included Cyprus on their so‐called blacklists of "tax havens." While most countries have removed Cyprus

from their blacklists, for some companies, the perceived "taint" remains. Additionally, with the recent Eurozone

financial crisis, more notably Greece, many MNCs remain wary as to any lack of stability in Cyprus.

Netherlands

With the 2005 protocol amending the U.S.‐Netherlands Income Tax Treaty as well as some planning techniques

available under Dutch law, the Netherlands may become a more popular jurisdiction to use for an

overall holding company. The Netherlands also has one of the widest treaty networks in the world with

countries outside of Europe, so dividends can usually be repatriated through the Netherlands with minimal

or no withholding tax. Under the recent protocol, dividends from the Netherlands to the United States are

entitled to zero withholding if the U.S. parent is a public company and owns at least 80 percent of the Dutch

company's stock. Where the U.S. parent is not public, it may also be possible to attain a ruling to achieve a

zero rate.

·  If the requirements for zero withholding are not satisfied, the same effect can be achieved by using the

so‐called CV/BV structure (which may also provide other benefits as described below). Under this structure,

a commanditaire vennootschap (“CV") is formed to act as the top‐tier holding company; the CV, in

turn, owns all of the stock of a beslater vennootschap (“BV"). The Dutch tax authorities have ruled that

dividends distributed from Dutch BV to a CV are not subject to withholding, at least in the case where

the Dutch BV has an active business. Moreover, because the CV is a partnership for Dutch tax purposes,

the non‐Dutch owners of the CV are not taxed on their share of the CV's income, nor are they subject to a

withholding tax upon distribution. Thus, the net effect of this structure is that no Dutch tax is imposed

on distribution.

·  The CV/BV structure can be used for tax rate minimization planning as well as an overall holding company.

For example, intragroup debt financing through interest deductions is often used to reduce foreign

tax rates, and the CV/BV can be used for this at the same time it is being used as a group holding

company. The way it works is that the CV would make a loan to its BV subsidiary, and the BV on‐lends

the proceeds to operating subsidiaries. The subsidiaries pay interest to the BV, which in turn pays interest

to the CV. A small spread is left in BV, but most of the interest received by the BV is paid to the CV.

Since there is no withholding tax on interest under Dutch law and the CV is a partnership for Dutch tax

purposes, no tax is paid in the Netherlands on interest paid to the CV so long as there are no Dutch partners.

The net effect is that interest deductions reduce the taxable income of the foreign operating companies

but is not taxed in any jurisdiction (except for the small spread left in the BV).

·  The CV/BV structure may also be used as an intellectual property holding jurisdiction. This works the

same way in that the intellectual property is placed in the CV and licensed to the BV; the BV in turn licenses

it to operating subsidiaries. Royalty deductions are generated in the operating subsidiaries and

paid to the BV, which, in turn, pays a royalty to the CV while leaving a small spread in the BV. The result

is the same as in the example above with interest. Careful planning must be undertaken to achieve the

benefits of this structure and real substance may be required in the Netherlands. Also, under recent proposals

enacted in 2007, Dutch holding companies are even more attractive as under these new proposals,

dividends received by a Dutch company would not be subject to tax so long as they are paid from a

company that has an active business or is subject to tax at a rate of 10 percent. This is similar to the relaxed

requirements in Cyprus; however, because the Netherlands has a far wider treaty network and is

more respected, the Netherlands appears more advantageous than Cyprus. Because most other holding

company regimes have a so‐called subject‐to‐tax requirement, the Netherlands could become the favored

jurisdiction.

Other European Jurisdictions

Other European jurisdictions have holding company regimes that may work well in Europe depending on

the particular circumstance. For example, Switzerland, Sweden, Denmark and Norway all have holding company

regimes. The U.S. tax treaty with each of Sweden, Norway and Denmark has also been amended to provide

for zero withholding on dividends; Spain itself has zero withholding under internal law as long as the

dividend is not paid to a blacklisted country. Proper planning may need to be undertaken to avoid the Swiss

35‐ percent withholding tax on dividends. Sweden provides exemptions for dividends and capital gains as

long as the operating company shares are held for business purposes. Switzerland has fairly relaxed rules

for the exemption on receipt of dividends; there is no subject‐to‐tax requirement for dividends to be exempt,

but the Swiss company must own at least 20 percent of the share capital of the operating company. There is

no exemption for capital gains tax in Switzerland. While Denmark does have a capital gains exemption, it is

not very favorable, as it has a three‐year holding period requirement before it applies.

Belgium/Hong Kong Combination

The use of Hong Kong as a holding company may be beneficial if the multinational is operating in Belgium.

Belgium imposes an outbound withholding tax of 25 percent on dividends. Where the Belgium subsidiary

has a U.S. parent company, the tax can be reduced to five percent but cannot be totally eliminated, under the

U.S./Belgium tax treaty. Belgium and Hong Kong have a tax treaty under which the withholding tax on dividends

is reduced to zero, and there is no limitation on benefits provision in this treaty. Thus, it should be

possible to interpose a Hong Kong company between a Belgium subsidiary and its foreign parent (including

U.S. parent) to achieve zeros withholding on dividends paid from Belgium. Hong Kong has a territorial tax

system so dividends and capital gains received in Hong Kong will generally not be taxed if there are no operations

there.

Asia

Singapore may be beneficial as a holding company for Asian operating subsidiaries. Singapore has an extensive

network of tax treaties, particularly with Asian countries (China, Japan, Taiwan, Singapore, Indonesia,

Vietnam and Thailand, among others). As an example, withholding tax on dividends under the tax treaty

with Taiwan is reduced from 25 percent to zero, and under the treaty with Japan, the rate is reduced from

15 percent to five percent. In general, the income tax treaties that Singapore has with Asian countries reduces

the standard dividend withholding tax from 20 percent to rates between five percent and 15 percent

(in the case of Taiwan, zero). Internal Singapore law also provides that if dividends are paid from a jurisdic

tion that has a double tax treaty with Singapore, the dividends may be completely exempt in Singapore from

corporate tax. In addition, Singapore has no capital gains tax on the sale of shares, unless the company is a

dealer in securities. There is no withholding tax on outgoing dividends, as long as the recipient is in a jurisdiction

that has a tax treaty with Singapore and the dividend paid is from income earned outside Singapore.

The Netherlands also has favorable tax treaties with many Asian countries, such as Japan, Singapore, Malaysia,

Taiwan and China.

India

For investments in India, a Mauritius holding company should be considered. India imposes a capital gains

tax on the sale of shares by a nonresident and the Mauritius/India tax treaty has an exemption from this tax.

Mauritius itself has no tax on capital gains or dividends received, nor does it have any dividend withholding

tax. It is, however, important that the Mauritius holding company not be implemented in connection with a

sale of the Indian operating subsidiary, as the tax authorities may apply substance‐over‐form principles to

deny the benefits of the structure. Moreover, a transfer of appreciated shares of an Indian operating subsidiary

to the Mauritius holding company may be subject to capital gains tax. This tax may be avoided if the

transferor of the shares applies to the Indian tax authority for an exemption.

South America

Spain may be a useful jurisdiction to use as a holding company for certain countries in South America. Columbia

recently entered into its first income tax treaty with Spain, which was signed in March 2006. The

new treaty is very favorable and provides for zero withholding on dividends paid from Columbia if the recipient

holds at least 20 percent of the stock of the payor. Spain also has favorable treaties with Brazil, Chile

and Argentina. Other holding company regimes maybe helpful for other parts of South America. For example,

Brazil has favorable treaties with Sweden, Hungary, Luxembourg and the Netherlands. Peru also has

favorable treaties with Canada and Sweden, both of which can be used as holding companies.

U.S. 15‐Percent Dividend Tax

Another use of holding companies is to take advantage of the 15‐percent maximum U.S. federal income tax

rate on dividends paid to individuals. In general, dividends received by a U.S. individual shareholder of a

foreign corporation are subject to U.S. federal tax at ordinary income rates of 35 percent. However, dividends

received from "qualified foreign corporations," like dividends received from domestic corporations,

are taxed at 15 percent. In general, a "qualified foreign corporation" is a foreign corporation that either (1)

is publicly traded in the United States, or (2) is incorporated in a jurisdiction with which the United States

has a tax treaty, provided that the foreign corporation would qualify for the benefits of such treaty ( i.e., satisfies

the limitation on benefits provisions). A planning opportunity that may be available where a nonpublic

foreign company is not organized in a treaty jurisdiction is to interpose a company incorporated in such a

jurisdiction to take advantage of the special reduced 15‐percent dividend tax.

As an example, assume a company organized in the BVI (not a treaty jurisdiction) is owned by three U.S. individuals.

Dividends from the BVI to the individual U.S. shareholders would be subject to U.S. federal income

tax at a maximum rate of 35 percent. However, if a company organized in an appropriate treaty jurisdiction

is interposed, it may be possible to attain the lower 15‐percentrate. It is important to understand that, in

this context, direct benefits are not being claimed under the treaty. This reduced rate of the tax is not provided

in the treaty itself, but by the U.S. internal law. However, U.S. internal law provides that the foreign

company must be entitled to treaty benefits on a hypothetical payment from the United States. Under most

treaties, the limitations on benefits (LOB) provision is satisfied if a sufficient amount of the stock is ultimately

owned by individuals who are residents of "good" countries. Under some treaties, residents of the

United States count as "good" for this purpose.

For example, under the LOB provision of Article 24 of the U.S.‐Luxembourg treaty, the LOB limitation on

benefits provision is satisfied if at least 50 percent of the principal class of shares of a company is owned by

Luxembourg residents or U.S. citizens. Alternatively, under Article 24 of the same treaty, the limitation on

benefits clause can generally be satisfied if at least 95 percent of the shares are ultimately owned by seven

or fewer individuals who are either residents of the EU or a NAFTA member state. Thus, since U.S. residents

count as "good" under either test, interposing a Luxembourg corporation should allow the dividends to

qualify for the 15‐percent rate. Care will also have to be taken to ensure that no tax is incurred on receipt of

the dividend in the hands of the holding company. It may be necessary to interpose a second holding company

to avoid this.

Conclusion

In summary, the use of offshore holding companies can provide meaningful tax savings to multinationals.

The appropriate jurisdiction of the holding company or companies will depend on where the multinational

operates its objective on exit and/or repatriation and its concern with the perception in the marketplace.

Oftentimes multiple holding companies are needed to achieve optimum results, and many holding companies

can be used for multiple purposes. All of these factors should be considered in structuring the multinational's

operations.