A holding company is a legal entity that owns and controls other companies, with the primary operational activities carried out by its subsidiary companies. It is established to mitigate risks for the owners, as their liabilities are limited to the shares or assets associated with the subsidiary held by the holding company.
The use of a holding company structure is common among medium to larger-sized foreign companies, primarily for tax advantages and liability limitation. However, foreign companies and investors intending to establish a holding company in Singapore must appoint a local resident director or a trusted corporate service provider.
Requirements for establishing a holding company:
- Have one or more shareholders within the company.
- Set up a corporate bank account if necessary.
- Appoint at least one local director who is a resident of Singapore.
- Obtain a registered physical address approved by the Urban Redevelopment Authority (URA).
- Maintain a minimum share capital of $1.
- Appoint a resident secretary within 6 months after company registration.
Substance requirements for Base Erosion and Profit Shifting (BEPS): BEPS refers to tax planning strategies used by multinational enterprises to exploit gaps and discrepancies in tax rules and avoid paying taxes. To address this, Singapore has implemented economic substance requirements for companies, including holding companies. These requirements mandate having an adequate number of qualified employees and incurring specific operating expenditures for core income-generating activities. The aim is to enhance the coherence of international tax rules and ensure a transparent tax environment in Singapore.
Why Singapore is an ideal jurisdiction: Singapore is an attractive location for foreign companies to establish a holding company due to its strategic geographic position, economic connectivity, excellent infrastructure, robust legal framework, efficient tax system, skilled workforce, and political stability. Many companies choose Singapore as a base to access the high-growth markets of Southeast Asia and the ASEAN region.
Benefits of setting up a holding company:
- Protection against financial loss and liability: A holding company is not liable for actions by its subsidiaries that result in financial loss or penalties.
- Taxation advantages: Holding companies can benefit from double tax treaties, incentives, and avoid unnecessary taxes on capital gains, dividends, royalties, and interests. Singapore has Double Taxation Agreements (DTAs) with over 80 countries, allowing for reduced tax rates or exemption from withholding tax obligations.
- Consolidation of bookkeeping: Holding companies can consolidate their bookkeeping, reducing paperwork, and allowing gains from one subsidiary to offset losses in another.
- Protection of intangible assets: By transferring ownership of valuable assets to a separate subsidiary, a holding company can provide protection against breaches.
- Deductible expenses: ACRA allows certain deductible expenses for holding companies, including regulatory and statutory expenses, as well as direct and indirect expenses like management and insurance fees.
In conclusion, Singapore’s robust regulatory framework, favourable tax policies, and reliable legal system make it an ideal jurisdiction for foreign companies looking to establish a holding company to access the high-growth markets of Southeast Asia.