Holding companies: why and where to domicile one

A company is in principle taxable in the state where it has its place of effective management, that is, the place where key management and commercial policy decisions are made.

This criterion is factual: it is established by where board meetings are held, where the directors reside, where contracts are negotiated and signed, and where the business is administered from.

Registration abroad is therefore not enough. An Estonian, Cypriot or Luxembourg holding company whose decisions are taken from France may be taxed there, with the resulting reassessments and penalties.

The French tax authorities also have rules targeting companies established in preferential tax regimes, which allow the profits of controlled entities to be taxed in France.

We publish neither the shareholding threshold, nor the preferential-tax criterion, nor the safe-harbour clauses of these rules: they do not appear in the extracts we have been able to verify, and their application must be established with an adviser.

A common confusion is worth clearing up: the registered office and the place of effective management are two distinct concepts. The first is a matter of company law and appears on a register extract; the second is a matter of tax law and is established by facts. A company may perfectly well have one here and the other elsewhere.

The jurisdictions themselves now require economic substance. The Emirates make their free zones' zero rate conditional on real premises, staff and expenditure; the Cayman Islands have adopted comparable requirements.

The requirement therefore comes from both sides: the state where the director resides wants to show that management takes place there, and the state of domicile wants to show that it takes place there. A structure without substance fails before both.

Substance is built and documented: an office, a local or resident director, decisions taken and recorded on site, expenses incurred locally. It has a cost, and that cost must be compared with the expected tax saving.

For a medium-sized personal holding company, this cost frequently exceeds the saving. It is the calculation that domiciliation offers never present.

Estonia applies tax deferral: 0%¹ on undistributed profit, about 22%² of the gross amount on distribution. This mechanism favours a company that retains its earnings, and brings nothing to one that distributes everything.

Cyprus has raised its corporate tax to 15%³, from 12.5%⁴ previously, and does not tax gains on the disposal of securities, at a rate of 0%⁵.

Hong Kong applies strict territoriality and a profits tax of 8.25%⁶ on the first band, then 16.5%⁷ at the standard rate.

Singapore taxes profits at 17%⁸ and does not tax capital gains, at a rate of 0%⁹, subject to repeated trading transactions being recharacterised.

These rates mean nothing until the question of effective management is settled. They describe what would be paid if the structure were genuinely located there, not what will be paid if it is not.

1. Determine honestly where decisions are made, and by whom.
2. Calculate the cost of the necessary substance, and compare it with the expected saving.
3. Check whether the French rules targeting controlled foreign entities may apply.
4. Comply with French reporting obligations on shareholdings and accounts held abroad.
5. Deal separately with the question of your own tax residency, which is governed by Article 4 B of the French General Tax Code.

The practical conclusion is that domiciling a holding company is never the first issue. The first issue is the director's residence: once it has genuinely moved, choosing the jurisdiction becomes an ordinary technical question; as long as it has not, no domiciliation produces the desired effect.