An excellent place to start when creating your international holding structure is by forming a holding company in Singapore. To grow their operations and also reduce taxable income, numerous multinational organisations have constructed their own holding structures throughout the world, including Singapore.
Numerous industry behemoths, like Berkshire Hathaway, DBS Group, and Alphabet (Google), have established either their holding or subsidiary corporations in the city-state. Singapore is one of the best locations to start any company including a holding company because of several factors. The ease of incorporation in Singapore and its advantageous tax system are the most significant advantages.
A Singapore Holding Company: What Type of Company Is It?
A holding company is typically a non-operational firm that owns a controlling or non-controlling interest in another company or groups of companies. The assets that a holding corporation can own include real estate, patents, trademarks, stocks, works of art, etc. All operations are usually carried out concurrently by the subsidiary firms it owns.
A second company is frequently referred to as a holding company’s “wholly owned subsidiary” if it is owned by the first. The “parent” or “umbrella” company is another name for the holding company.
A holding company is regarded as a Singapore holding company if it is registered there. A Singapore holding company may own subsidiaries and assets that are located anywhere in the world.
What are the Benefits of Forming a Singapore Holding Company?
Due to its growing economy and advantageous location for trade and business, Singapore is regarded as one of the richest nations in the world. In addition, the Singapore government has made the whole process of incorporating a company in Singapore very simple and seamless, and because of this a lot of entrepreneurs choose Singapore as their base.
Creating a Singapore holding company offers various benefits, some of which are as follows:
1. Reduced Risk and Favorable Financing Conditions
Even if one of the subsidiary companies fails, the business can still function thanks to the structure of a holding company. This reduces the organisation’s overall risk and, as a result, the cost of capital.
Because the risk is viewed as being smaller, lenders are more inclined to offer better financing conditions for a holding company rather than a single-company entity. By providing downstream guarantees for them and lowering the expenses of its Singapore subsidiaries, a holding company can assist them in getting more affordable financing for their projects.
Additionally, capital-intensive subsidiaries — those that are heavily indebted — and other operating subsidiaries can be segregated due to the structure of a holding company.
When a Singapore subsidiary firm experiences financial difficulties, the issues will only affect that particular company. The various other subsidiaries that are part of the parent firm will not be impacted or affected in any way. Due to this, bankers and other financial institutions are more inclined to provide financing to both the parent firm and its subsidiaries.
2. Transactions and Asset Protection
Holding corporations can serve as a way to safeguard a company’s valuable assets. This can be accomplished by severing the important assets from the trading company, such as patents, trademarks, intellectual property, and so on. We refer to this as ringfencing.
If a business is experiencing financial difficulties or is being sued, ringfencing can help to safeguard its assets. In this manner, only the trading firm’s assets may be taken if it experiences a problem, such as a legal dispute or when a creditor seeks to collect a debt. All of the holding company’s valuable assets will still be secure.
The usage of a Singapore holding company is popular among HNWIs, or high-net-worth individuals, for this reason.
Holding firms can easily buy and sell patent portfolios thanks to having this type of structure.
It is easy to conduct transactions for these assets because they are segregated in terms of their ownership by various independent entities. Since the accounts are kept separately, you can sell the subsidiary as a separate entity without reorganising the company or conducting extensive accounting audits and reviews to persuade the buyer about the traded entity’s value. Holding companies can easily buy and sell assets that any subsidiary owns.
3. Transfer of Assets Across Generations
A holding company is able to implement succession planning for its subsidiaries. While ensuring that the entire estate can be passed off as one single entity, tax deferrals can also be obtained for the transfer of assets.
The regulatory environment in the nation is regarded as favourable to trust structures, including holding companies.
Holding corporations can benefit from several things, including:
- Assets from subsidiaries in multiple nations may be transferred simultaneously.
- Family wealth can be managed according to specific guidelines that can be developed consistently.
- Through a single delegation, expert managers may be hired to handle both risk management and asset protection.
To incorporate asset holdings with additional tools like foundations, wills, family offices, and durable powers of attorney, several intergenerational plans can be devised at the same time.
4. Prevention of Double Taxation
This is unquestionably the greatest advantage of starting a business in Singapore. The nation has helped businesses avoid paying taxes twice by signing the Avoidance of Double Tax Agreement with more than 70 nations (one in Singapore and the other from foreign taxpayers’ home countries).
Any business can reduce its financial load by avoiding such onerous taxes. However, the Singapore holding company must be a tax resident of Singapore to receive DTA tax benefits.
The “control and management” criteria determine Singapore Tax Residency. If the business and strategic decisions are made in Singapore, a holding company may be categorised as a resident firm, hence the “control” and “management” parts. This is possibly not the case for foreign-owned businesses.
Non-residents, including holding businesses with foreign ownership, must comply with the Inland Revenue Authority of Singapore’s (IRAS) requirements to obtain a Certificate of Residence (COR) to be regarded as tax residents. To claim tax benefits, the COR must be delivered to the foreign tax authorities.
Even if the corporation submits the COR, foreign regulatory agencies may still reject tax relief requests.
IRAS must consider the following before issuing a COR:
- The area in Singapore where management and control are practised.
- If the justifications for establishing a holding company in Singapore are sound.
- If administrative services are provided to the holding company by Singaporean businesses.
- If a firm has associated entities conducting business in Singapore.
- If a Singapore-based executive director works for the business.
5. Absence of Capital Gains Tax
In Singapore, the selling of shares is not subject to capital gains or transfer tax. As a result, neither at the level of the subsidiary nor the holding company is the sale of assets or stock by a parent business a taxable event.
However, where capital gains are the company’s primary source of income or if the holding time of an item sold is brief, they are regarded as ordinary income and are therefore subject to income tax. Keep in mind that capital losses are not tax deductible either.
6. Dividends are Tax-Exempt
As long as the “foreign headline tax rate” and “subject to tax” requirements are met, holding corporations that receive dividends from their foreign subsidiaries may benefit from tax exclusions from corporate tax.
The home nation of a subsidiary should theoretically tax the income of the subsidiary at a rate of at least 15%, and as a result, no payment needs to be made for taxes.
When delivered to the holding company in Singapore, dividends from tax-neutral or low-tax jurisdictions may be subject to tax. Singapore currently has no regulations governing controlled foreign corporations. Foreign revenue from overseas subsidiaries that have not been distributed may not be taxed.
The tax burden borne by the holding company can be lessened by these rules and, in some rare instances, even eliminated.
8. Control That Is Centralised and Consistent
Typically, the holding and subsidiary firms are under the control of the latter’s shareholders via the board of directors. This gives the company the ability to provide each firm with the freedom to function on its own while centralising its strategic cooperation.
It is also possible to establish uniform ownership and governance practices across subsidiaries by using a holding company structure. For instance, new investors in a corporation can demand that all patents and intellectual property assets of the business be owned under a single subsidiary so they can be handled openly.
9. Appealing Tax Rates
Singapore offers you more advantages than just avoiding double taxation. Additionally, you receive one of the best corporate tax rates in the world. Singapore’s marginal corporate tax rates are as low as 17%, and the effective tax rate can be further reduced through a variety of schemes.
With all of these, Singapore is among the top locations for forming a holding company. You can reinvest the money you save by avoiding double taxation and paying less tax for your business. Only a few locations on earth will allow you to enjoy both of these advantages.
10. Additional Incentive Programs for Holding Companies
The Headquarter Incentives are open to Singapore holding firms. Multinational corporations are provided with this incentive to persuade them to move their regional or global headquarters to Singapore.
Other incentives, such as Development and Expansion Incentives, are also in effect. The Post-Pioneer incentive, which was viewed as restricted, was replaced with the DEI in the Year of Assessment 1997. Qualifying holding corporations may pay taxes on the expansion income at a reduced rate (no less than 5%) throughout the tax relief period.
The amount of expansion income, which is based on the average annual income three years after the tax relief period, may result from operations that bring in revenue exceeding the company’s basic profit.
Through the IDI, or IP Development Incentive, Singapore additionally provides tax incentives for IP holdings. Up until 2023, this incentive will apply a 5%–10% tax rate discount to qualified royalties and other IP-based revenue. Within Singapore, this means a specific amount of employment is generated, money is spent, and other economic obligations are fulfilled.
Holding corporations are eligible to request additional tax breaks for expenses related to R&D, licensing, and IP registration.
One of the greatest jurisdictions to adopt a holding company structure is Singapore. Such structures are well-suited to the regulatory environment, tax laws, and legal system.
Choose a good Singapore corporate services partner that will make sure your company is appropriately registered to pass the economic substance test and that you won’t run into any issues with regulatory authorities.
With the aid of a top-notch corporate service provider, a Singapore holding company may be set up online in a few days. You merely need to provide the appropriate data and documentation. Your service provider will handle the application and filing processes on your behalf.