Should you set up a holding company in Singapore?
Some of the most well-known businesses of the world operate under a holding company structure. What is it and why is it so popular in Singapore? In simple terms, a holding company is one that owns assets, but does not have any operations, or business activities; the real work is done by the subsidiary companies that it owns. What are the benefits and the challenges of such a structure in Singapore? Would such a structure make sense for your business? You will find answers to these and other questions about holding companies in this article.
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What is a Singapore holding company?
In general, a holding company is a company that does not conduct any actual business but is owns an interest (controlling or non-controlling) in other companies. A holding company can also own other types of assets such as property, patents, trademarks, stocks, artwork, etc. If a holding company fully owns another business, the second business is often referred to as its "wholly owned subsidiary." The holding company is often referred as the "parent" or the "umbrella" company. A holding company that is registered in Singapore is considered to be a Singapore holding company. The subsidiaries and assets owned by a Singapore holding company can reside in Singapore or anywhere else in the world.
A few points to keep in mind:
- A holding company can be structured in a variety of forms. It can be a corporation, limited liability company, limited partnership, a trust, or a foundation. The most widely used structure for a holding company is a limited liability company.
- The holding company often exercises strong control over its subsidiaries through its participation in (or control of) the board of the subsidiary. However, the holding company usually does not manage the day-to-day operations of a subsidiary.
- The holding company is insulated from the liabilities of the subsidiary. Loss insulation is a key attraction of the holding company structure.
- The parent can coordinate and pool the resources of its subsidiaries. If a subsidiary does well, the parent benefits but if the subsidiary performs poorly, the parent is not punished beyond loss of the parent's original investment in the subsidiary.
Holding Companies enjoy several advantages in Singapore because the country's regulatory framework has been designed to provide preferential treatment to such structures. They include:
- No limitations on the domicile of assets owned by a Singapore holding company. The subsidiaries of a Singapore holding company can be based either in Singapore or in any foreign country; thus, providing extremely flexibility for such a structure.
- Full tax exemption for dividends paid by subsidiaries to the parent holding company in Singapore,
- Capital gain tax exemption on profits from sale of a subsidiary by a Singapore holding company;
- Extensive network of double-tax treaties with other countries to reduce the applicable taxes in other countries;
- Special government incentives such as Pioneer Status Incentive, Development and Expansion Incentive, etc. are available to holding companies setup in Singapore (often referred to as the Headquarter Incentives);
- Favorable accounting treatment for consolidated books of a Singapore holding company whereby losses from one subsidiary can offset gains from another;
- Favorable accounting and tax treatment of passive income of a Singapore holding company;
- Specialized regulations to simplify the compliance framework for holding companies, such as the Financial Holding Companies Act
These are discussed below.
Holding company examples that involve Singapore
Large businesses are often organized in a holding company structure; they are prevalent in all industries and most countries. It is very likely that you used the products or services of companies organized in a holding company structure some time today. Singapore is used in the holding company structure of many of these organizations. A few well-known brands that use a holding company structure with either the holding company or one or more subsidiaries in Singapore include:
- Alphabet (the parent company of Google has subsidiaries in Singapore)
- American Express (Subsidiaries in Singapore)
- Barclays Plc (Subsidiaries in Singapore)
- BP (Subsidiaries in Singapore)
- Berkshire Hathaway (Subsidiaries in Singapore)
- Citigroup (Subsidiaries in Singapore)
- DBS Group (Holding company in Singapore)
- Flextronics (Holding company and subsidiaries in Singapore)
- Goldman Sachs (subsidiary in Singapore)
- HSBC (Subsidiaries in Singapore)
- Johnson & Johnson (Subsidiaries in Singapore)
- Royal Dutch Shell (Subsidiaries in Singapore)
- Singtel (Holding company in Singapore)
- Trafigura Group (Subsidiaries in Singapore)
- UBS (Subsidiaries in Singapore)
- Volkswagen (Subsidiaries in Singapore)
Johnson & Johnson is a good example of a holding company. It was founded in 1886 and now operates nearly 260 companies across the world in its family of companies, many of whom are very well-known household brands; some examples of its subsidiaries are shown in the figure below. J&J has several Singapore-based subsidiaries and it uses Singapore as the regional center for its Asia-Pacific region.
Another example is Alphabet, the parent company of Google. In 2015, Google reorganized its corporate structure and Alphabet became the parent company of Google and many of Google's subsidiaries. The two original founders of Google removed themselves from executive duties at Google and have assumed the roles of CEO and President at the holding company. Singapore figures prominently in the new holding company structure with many of Alphabet's subsidiaries being based in Singapore (such as, Google Singapore Pte Ltd, Google Payment Singapore Pte Ltd).
The new structure was designed to enable the largest and most profitable business of the group - Google - to focus on its core mission. The structure also provided more freedom to the subsidiaries to operate independently without oversight or interference from Google or the other subsidiaries. At the time of this restructuring Larry Page, a founder of Google and the CEO of Alphabet, described the new holding company as follows:
Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead... Fundamentally, we believe this allows us more management scale, as we can run things independently that aren't very related.
Berkshire Hathaway, a quintessential Holding Company
Perhaps the most well-known example of a holding company structure is Berkshire Hathaway, the company that made Warren Buffet rich and famous. An overview of the company provides a good introduction to the financial mechanics of this structure. It is also a good example because it uses Singapore as a key jurisdiction in its holding company structure with many of its operational subsidiaries being based in the country.
The company is named after two cotton mills that were founded in the 19th Century, Berkshire Fine Spinning Associates and Hathaway Manufacturing Co. As the textile industry moved out of the USA to the developing world, the two companies merged in 1955. The fortunes of the combined company continued to decline; Warren Buffett started buying the stock of the company in early 1960's and by 1965 he acquired control over it. Then in 1967, Buffet acquired an insurance company - National Indemnity - through Berkshire Hathaway and set it on course to become a giant holding company.
Today Berkshire Hathaway does not operate any textile mills, it is simply a holding company that owns hundreds of subsidiaries and holds stock in many other public and private companies. Its holding portfolio changes day by day as assets are acquired and sold. To get a sense of the scale of its holdings, click and expand the above figure (from finbox.io). These include assets in industries as diverse as railroads, auto insurance, finance, and men's apparel. In fact, it is hard to find a sector where Berkshire Hathaway does not have assets. Business jet rental (NetJets), jewelry (Borsheim's Fine Jewelry, Helzberg Diamonds, Ben Bridge Jeweler, Inc.), furniture (RC Willey Home Furnishings, CORT), candy (See’s Candies), trucking (McLane Co., Inc.), modular houses (Clayton Homes), newspapers (The Buffalo News), insurance (GEICO), fast food (Dairy Queen), Banking (Wells Fargo), etc. are all well represented in its holdings.
Historically, the company has made its acquisitions using the reserves from its insurance subsidiaries, also known as the "float". These are the funds paid to an insurance company as premiums but that have not yet been paid out to cover claims. Berkshire Hathaway has insurance reserves of over $100 billion.
Buffet is an ardent follower of Benjamin Graham and is the classic value investor. He purchases companies that are fundamentally robust but are facing hard times and are therefore available on the cheap. Buffet cleans up his acquisitions, often by replacing management, so that they start generating dividends. These dividends are then used to fund future acquisitions. Buffet is laser focused on dividends. He will usually not acquire companies that do not pay dividends. Nearly all of his large holdings (Apple, Coca-Cola, American Express, etc.) have a robust track records of paying dividends. Buffet's basic mantra is: acquire companies with fundamentals that are strong enough to allow regular cash payments to shareholders and don't chase shiny revenue growth alone. Watch the video to understand Berkshire Hathaway's basic business model.
Benefits of a Singapore Holding Company
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.
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.
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 since it does not impose any tax on dividends from the subsidiary to the parent company. Similarly, interest paid by a subsidiary to the parent is also treated as a pre-tax expense. Furthermore, Singapore does not have any capital gains tax. As a result, asset or subsidiary sale by the parent does not result in any tax obligation at either the subsidiary level or the holding company level. These regulations make Singapore an ideal location for both the parent and the subsidiaries.
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 made at arm’s length and should be properly documented and reported. A good corporate services partner can help you ensure this compliance.
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.
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.
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.
Challenges of a Holding Company
A holding company structure has some disadvantages as well. These include complexity, lack of transparency, slow decision-making, and possibility of market manipulation. These are applicable for holding companies in general and are not specific to Singapore domiciled holding companies.
Challenges for Management of Parent
Often the managers of the holding company are pulled in multiple directions by the demands of their subsidiaries. They may have to make crucial decisions about a subsidiary without in-depth knowledge about its business. This lack of information can result in sub-optimal decisions.
Challenges for Subsidiaries
Conversely, the managers of the subsidiary may not have enough information about the overall strategy or goals of the parent company. The interests of the two companies and its managers may not be correctly aligned. For instance, a subsidiary may wish to buy raw material from the best supplier in the market but the parent company may want it to buy it from one of its subsidiaries. Such competing interests between management can result in conflict and poor business decisions.
Challenges for Shareholders
The holding company structure provides the opportunity to create opaque business relationships. Such a framework can work to the disadvantage of the minority shareholders who do not get an accurate picture of the whole business. Majority owners can use transfer pricing or preferred supplier relationships to their advantage. This can be a particularly serious issue if the ownership of the holding company and all subsidiaries is not symmetric and parties own different proportions of the subsidiaries.
Because the market does not have a clear picture of the operations of all subsidiaries, it may penalize a holding company's stock price. Furthermore, if the holding company owns subsidiaries that are not performing well financially, the market may penalize the holding company disproportionately for the performance of that subsidiary while not giving parent full credit for the financial performance of the overall parent business.
Is Singapore Holding Company appropriate for you?
Should you create a holding company structure that is based in Singapore? This is a nuanced decision and below we describe the factors that you should consider in order to arrive at an answer to this question. However, if you have already made a decision to use a holding company structure and are deciding on the jurisdiction then for the reasons explained in this article, Singapore should be on your short list.
Determine Your Objectives
Make a dispassionate assessment of your objectives; in other words, identify which of the following results you wish to achieve with a holding company structure:
- Insulation of various lines of business from each other's risks
- Tax optimization
- Asset protection
- Prepare for asset sales in future
- Inter-generational transfer
- Reduction in cost of capital
- Centralization and standardization of corporate control across lines of business
If none of the above objectives are important to you then a holding company may not be necessary for your situation. But if some of these factors are important, discuss those factors with your corporate services advisor to create a structure that will address them.
Evaluate the Nature of Your Assets
The types of assets that are part of your business will influence your decision. If you have assets of more than one of the following asset types then a holding company is very likely the right structure for your. Furthermore, even if you have only one type of assets but the assets reside in multiple jurisdictions then too a holding company may be appropriate.
Equity Holdings: If the business owns minority (or full) stakes in other companies, those stakes can be owned by individual subsidiaries.
Active Businesses: If the business operates individual lines of business that can logically be separated into individual stand-alone entities then each such business should be under a separate subsidiary.
IP Assets: If the business owns intellectual property assets, they are a very good candidate for being placed in one or more separate subsidiaries.
Leasing: If parts of the business utilize real estate or expensive equipment, those assets can be placed in separate subsidiaries and leased to the other parts of the business.
Financing: This is a complex topic but the short version is that if parts of your business are income generating while other parts are still growing then you should insulate the income generating parts in a separate subsidiary to protect them from the risks of the growing business who may have to undertake higher risks.
Assess Tax and the Economic Substance Considerations
Since holding companies are primarily a financial structure, they can be very easily moved and restructured to respond to changing tax environments without having to move the underlying physical assets (such as plants and equipments). The basic arrangement in a holding company is that it accumulates profits from subsidiaries for reinvestment in other subsidiaries or for distribution to shareholders; and at times it may sell some assets. There are potential tax payments at many stages here: corporate and dividend tax at the level of the subsidiary; corporate tax at the holding company; withholding tax when distributed to shareholders; personal income tax at shareholder level; capital gains if any subsidiary is sold; etc.
The objective of a properly designed structure is to eliminate or reduce all or most of these taxes. This can be done through a variety of tools that include:
- Inter-company transfer payments for products or services;
- Inter-company loans and interest payments;
- Consolidation of tax returns at the holding company level;
- Specialization of subsidiaries to enable use of tax incentives;
- Location of subsidiaries or holding company in jurisdictions where no taxes are imposed on dividends and/or capital gains;
- Optimization for exit taxes;
- Use of tax treaties;
- Tax residence of the Ultimate Beneficial Owners (UBO);
- Compliance with Controlled Foreign Company (CFC) rules by optimizing ownership percentages;
- IP licensing across subsidiaries
Furthermore, some jurisdictions use the "full imputation system" wherein the profits are only taxed once at the level of the operating company that generated them. Such a jurisdiction is very good for a holding company structure. Singapore is an example of such a jurisdiction.
Finally, it is very important that your structure should have economic and commercial justification (or substance) that can be transparently reviewed by the tax authorities. In the absence of such economic substance, your structure is likely to face scrutiny and challenges from the authorities. Some of the ways in which such substance tests can be met are as follows:
- Hiring local directors in the jurisdiction
- Creating a local office to store key documents and accounting records
- Hiring a local secretary in the jurisdiction
- Setting up a local bank account
- Conducting annual general meetings to pass the "mind and management" tests
- Adequate R&D expenditure for IP assets
For the above reasons, it is important to engage a corporate services firm that has experience in these structures and can evaluate your situation and advice you if a structure can be designed that will pass muster for your specific situation. Also, see how to incorporate a limited liability company in Singapore.
Banking and Financial Services
Access to safe, efficient, and comprehensive financial services will be another consideration. You should establish a holding company structure only if such services can be made available to the parent and the subsidiaries cost effectively. Not all jurisdictions provide such services. But Singapore provides world-class financial services and nearly all major international banks have a presence here. Sophisticated capital market products and services are easily available in Singapore and they include brokerage services, investment products, financial engineering services, M&A services, art holding services, etc.
Compare and Evaluate Structures
If you do decide to move forward with a holding company structure, the objectives of your holding company will dictate the right structure for it. In most situations, a private limited company (i.e. a corporation) is the best structure but below we describe situations in which other structures may be appropriate.
Corporation: Most holding companies are set up as corporations. A corporation is a taxable entity and therefore it can utilize corporate tax benefits from tax treaties. It can also provide a more robust governance and management structure to the group. We recommend a corporation as the preferred structure for most of our clients.
LLC: If the only objective of the holding company is to provide a layer of protection and limit liability on passive assets then an LLC can also work. LLCs are simpler than corporations and have fewer operational requirements and formalities than corporations.
Trust: If your primary purpose is estate and succession planning– then you should use a corporation in combination with a Trust. Trusts establish a legal contract between the trust settler (i.e. the creator of the trust) and the trustee (the trust administrator) for tax-efficient transfer of assets between generations. If properly used, foreign Trusts are extremely powerful tools for asset protection and tax optimization.
Foundation: If the jurisdiction of your residence does not differentiate between formal and beneficial ownership, it will disregard trusts. Since foundations are a legal construct recognized in nearly all jurisdictions, a foundation can be used in such a case. We recommend the use of a foundation in combination with a corporation for such clients.
You should evaluate the increased cost of creating and operating multiple entities in a holding company structure against the benefits the structure will offer. Once again, Singapore offers very cost-effective options for creating and managing such a structure.
Select Jurisdiction and Partner
Finally, you should judiciously chose the jurisdiction where you plan to set up the holding company and some or all of your subsidiaries. You should also select a corporate services firm that is intimately familiar with the laws of the jurisdiction and that can guide and hand-hold you through the process. Singapore is globally recognized as an excellent jurisdiction for setting up your holding company because of the numerous advantages that its regulatory framework, tax system, and legal system offers for such a structure. We are one of the leading corporate services firms in Singapore; we would love to discuss your needs to explore if we can have to as a client.
A holding company can provide flexibility and a number of other benefits for your business; these benefits include protection of assets, reduction of financial risk, tax optimization, and centralization of control. But the structure also comes with some challenges. You should evaluate these pros and cons against your situation to determine if such a structure is appropriate for your business.
If you decide to use a holding company structure, Singapore offers one of the best jurisdictions for it. Its regulatory framework, tax policies, and legal system are very favorable for such structures. Select a corporate services partner firm in Singapore that will ensure that your structure is correctly designed to pass the economic substance test and will not face any objections from the regulatory authorities.
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We can help you design the right structure for your business and asset holdings. We can propose a customized solution that is tailored to your unique situation and delivers protection, privacy, risk mitigation, tax optimization, and operational efficiency. Contact Us if you need assistance with setting up a new Singapore holding company or if you would like to transfer the administration of your existing company to us.