Holding company: Singapore or Luxembourg? (Elvira Khairoullina, Senior Lawyer International Law Firm Integrites)
Holding company: Singapore or Luxembourg?
International Law Firm Integrites
A country to be an attractive location in which to set up a holding company must meet certain criteria. Below we compare the jurisdictions of Singapore and Luxembourg as currently these jurisdictions are the most popular ones to set up a holding company. Set forth below is an analysis and comparison of the above jurisdictions in terms of existing requirements, benefits, preferences, and advantages for the placement or establishment of a holding company, including the related corporate and tax aspects.
Under the Companies Act, the following types of companies may be registered in Singapore:
·public company limited by shares or public company limited by guarantee;
·public or private company unlimited with share capital;
·private company limited by shares; and
·exempt private company limited by shares, or exempt private company unlimited with share capital.
In practice, the most preferred types of companies in terms of taxation and conducting business in Singapore are a public company limited by shares, and an exempt private company limited by shares. A company registered in Singapore as an exempt company is provided with advantages described below in Section 2 «Taxation».
A company may be registered as a public company, if the Memorandum of Association or Articles of Association of such company restrict the rights of the company’s members to transfer the company’s shares and limit the number of the company’s members to 50. An exempt company means a company with the number of shareholders not exceeding 20 persons where none of such persons may be a legal entity.
Under the laws of Singapore, to set up a company, at least one shareholder, whether a legal entity or an individual, shall exist. In doing so, such legal entity or individual may be a resident of any country (jurisdiction).
The establishment of a company in Singapore requires the existence of at least one director residing in Singapore.
Minimum Paid In Share Capital
The minimum paid in share capital is S$ 1.00 or 1 unit in any foreign currency.
Office in Singapore
To register a company in Singapore it is not necessary to lease an office in Singapore.
Information about the shareholders and the directors is publicly available.
Territorial Taxation Principle
A territorial taxation principle applies in Singapore. Based on such principle, the following shall be subject to income tax:
-any income calculated and generated from a source in Singapore; and
-any income transferred to Singapore from a foreign source.
Under the tax laws of Singapore, an income is not deemed to be generated from Singapore if:
-the relevant agreement was entered into and signed beyond the territory of Singapore; or
-the services were provided beyond the territory of Singapore; or
-the relevant capital was used outside of Singapore; or
-proceeds from the sale of goods/services arose outside of Singapore; or
-expenses associated in connection with the provision of services or supplies of goods were paid outside of Singapore; or
-the goods were stored at a location other than Singapore.
A Singapore company may be exempt from the tax on income received from a foreign source (for example, income from the sales of services or income in the form of dividends), if such income was taxed in the country of origin at a rate not lower than 15%.
Corporate Tax (Profit Tax)
The current standard (maximum) corporate tax in Singapore is 17%. The tax laws of Singapore provide for a company’s profit a 75% tax deduction for the first 10,000 Singapore dollars and a 50% tax deduction for the following 290,000 Singapore dollars. For an exempt private company, within the first three years of its operation, the profit tax constitutes 0% for the first 100,000 Singapore dollars, and for the following 200,000 Singapore dollars (i.e. from 100,001 to 300,000 Singapore dollars) a half of the above standard rate (i.e. 8.5%) shall apply. For a profit exceeding 300,000 Singapore dollars a 17% tax shall be paid.
Goods and Services Tax (GST), an analogue of value added tax, is the basic indirect tax in Singapore. Its current rate is 7%. This tax is payable by companies whose proceeds exceed S$1,000,000 for any 12 consecutive months and applies to the sale of all goods and services in the territory of Singapore. The tax on goods and services acquired for an activity which is subject to taxation shall be deducted. The reports on this tax shall be submitted quarterly or monthly.
Capital Gain Tax
There is no capital gain tax (CGT) in Singapore. Therefore, the sale of an asset, if occurs, will not result in any tax liability, provided that certain conditions are observed. Thus, taking into account that, as mentioned above, an income generated outside of Singapore is not taxable in Singapore, an income which is also not taxed in the other country, might, as a result, be totally free of a tax. Such scenario is possible when the income, including any dividends and interest, is not subject to taxation in the country where the interest income is received and distributed.
In addition to the foregoing it should be noted that due to the absence of a CGT in Singapore, expenses related to the loss of capital grant no right to tax deductions.
Taxation of Dividends, Interest and Royalty
Singapore has currently around 69 double taxation treaties in place, including with Kazakhstan. In order that a company registered in Singapore may apply a double taxation treaty, it is necessary that such company be a resident of Singapore (a company is treated as a resident of Singapore if it is managed and controlled from Singapore).
Unless a double taxation treaty’s provisions apply, the payment of income from Singapore to abroad shall be taxed at source as follows:
A Singapore company which earns income from a country which has no double taxation treaty with Singapore may be granted a tax rebate with respect to income generated from such country. Unilateral tax rebate shall apply to all types of profit generated outside of Singapore, but within the limit of the Singapore income tax.
Tax Exemption of a Confirmed Holding Company
A holding may pay no tax in Singapore on its profit from the disposal of a foreign asset by virtue of applying the tax exemption applicable to a confirmed holding company. A confirmed holding company is exempted from income tax on the disposal of shares of its subsidiary(ies), if it owns at least 50% of the shares in such subsidiary within a minimum period of 18 months. In order to apply such advantage, the parent company must preliminarily agree its status as a holding company with the Inland Revenue Authority of Singapore (IRAS).
Banking Secret and Confidentiality
Singapore ensures a reliable protection of assets of a company due to the statutorily established bank secret and confidentiality provisions. In addition, the laws of Singapore neither restrict a company in its choice of banks and countries of their location nor limit the total number of its bank accounts. All information about the banking operations of a company is confidential. We consider this fact as interesting taking into account that, as described above, prior to actual remittance of income from a foreign source to Singapore, such income is not taxable due to the application of territorial taxation.
Foreign Currency Operations and Profit Repatriation
In Singapore, there is neither currency control nor limitation upon the profit repatriation.
Singapore companies are obliged to maintain accounting records and furnish tax returns. In doing so, a company may freely choose the period in a fiscal year for the payment of corporate taxes. The last day for furnishing a tax return is November 30. Taxes shall be paid for the preceding fiscal year. As specified in Section 2 «Taxation», the reports on GST must be submitted either quarterly or monthly.
Singapore companies are also subject to annual audit. However, such requirement does not extend to a company if its turnover for a financial year is less than S$5,000,000.
Finally, companies incorporated in Singapore are required to annually submit unaudited financial statements to the ACRA (Accounting and Corporate Regulatory Authority in Singapore).
Legal Forms of Companies
The laws of Luxembourg establish the following legal forms of holding companies:
·Societe Anonyme (SA); and
·Societe a Responsabilite Limitee (SARL).
There are two types of holding status in Luxembourg:
-the 1929-type holding; and
A minimum of two shareholders is required to set up a holding company in Luxembourg. Details of the shareholders appear on the public file.
A minimum of three directors is required. Directors may be bodies corporate or individuals of any nationality or residence.
Minimum Share Capital
The minimum share capital shall be:
-for a 1929-type holding, an equivalent of 25,000 Euro which has to be fully paid-in at the time of incorporation; and
-for a SOPARFI, an equivalent of 31,000 Euro of which at least 25% must be paid prior to the incorporation.
Office/Legal address in Luxembourg
Each company incorporated in Luxembourg is required to have a legal address in Luxembourg.
Details of the shareholders and directors appear on the public file. If anonymity is required for confidentiality purposes, it is permitted to use nominee shareholders and nominee directors.
The basic taxes in Luxembourg are the corporate income tax and the VAT.
Luxembourg corporations are subject to a corporate income tax rate of 21%. This rate applies to companies whose taxable income exceeds EUR15,000. Otherwise the rate is 20%. In addition, a surcharge of 5% of the corporate income tax is payable to the unemployment fund. A local income tax (municipal business tax) is also levied by municipalities (6,75% in Luxembourg City). The maximum effective overall tax rate for companies in Luxembourg City is 29.22%.
The VAT in Luxembourg amounts to 15%.
Taxation of dividends, interest and royalty
Dividends paid to a nonresident company are generally subject to a 15% withholding tax, unless the rate is reduced under an applicable tax treaty. Dividends paid by a SOPARFI or a 1929 holding company are exempt from withholding tax. No withholding tax is levied on dividends distributed by a Luxembourg company to a parent company located in a treaty country if the parent company meets the following requirements: (i) holds at least 10% of the company paying the dividends or a participation acquired for at least EUR 1.2 million; (ii) holds or commits to hold the shares for an uninterrupted period of at least one year; (iii) has a legal form similar to the one of the forms listed in the Luxembourg tax code; and (iv) is subject to a tax similar to the Luxembourg corporate income tax.
Interest and royalty are not subject to withholding tax.
Basic tax principles of 1929 holding companies
A 1929 holding company pays only two taxes which are as follows:
-a capital duty (droit d’apport) on incorporation, at a rate of 1% on share capital and subsequent capital increase; and
-an annual subscription tax (taxe d’abonnement) at a rate of 0.2% p.a., based on share capital.
In order not to lose its tax-exempt status, a 1929 holding company needs to ensure that at least 5% of its dividends received relate to foreign participants/shareholders who are incorporated in countries where the tax rate is lower than in Luxembourg. In practice, such tax rate in a country from which the dividends are received should be 11% as minimum. A 1929 holding company that loses its tax-exempt status will be subject to the normal corporate income tax regime.
The normal tax regime applies to SOPARFI’s. SOPARFI’s are fully covered by Luxembourg tax treaties.
A SOPARFI, provided that it meets certain conditions, is not subject to corporate tax on income received from its subsidiary as dividends, or from the sale of shares of its subsidiary, or liquidation of its subsidiary.
Dividends received by a SOPARFI from any company in which the SOPARFI has at least 10% shareholding (or if less, whose acquisition cost was at least EUR 1,200,000) are excluded from taxable profit of the SAPARFI if the company gives the Luxembourg tax authorities an undertaking that it intends to hold the shares for at least 12 months.
As mentioned above, when using nominee shareholders and nominee directors, the actual owner of a corporation in Luxembourg cannot be determined.
There is no currency control in Luxembourg.
Audit and Financial Statements
All Luxembourg companies are required to maintain the accounting records. The scope of information to be provided in the annual financial statements depends on the size of the company. The necessity to conduct an audit also depends on the size of the company. The required financial statements must be submitted to the State Companies Register within 12 months upon the end of a financial year. After submission, the financial statements appear on the public file.
A Luxembourg holding company is required to quarterly submit to the State Companies Register an income statement.
Based upon the foregoing, set forth below is a comparison of the jurisdictions of Singapore and Luxembourg:
Prestigious low tax jurisdiction
World offshore centre
Минимальный акционерный капитал
1 S$ or 1 unit of any other currency
An equivalent of Euro 25,000 for a 1929 holding company. 100% prepayment of the above amount is required on incorporation;
An equivalent of Euro 31,000 for a SOPARFI. At least 25% of the charter capital has to be paid up on incorporation.
The company shall have at least one shareholder, whether an individual or a legal entity, a resident of any country (jurisdiction).
A minimum of two shareholders is required.
At least one director.
A minimum of three directors. Directors may be legal entities or individuals of any nationality or residence.
Information about the shareholders and the directors is publicly available.
Details of the shareholders and directors appear on the public file. If anonymity is required, it is advisable to use nominee shareholders and nominee directors.
Incorporation of a company in Singapore does not require the lease of an office premise in Singapore.
Each company incorporated in Luxembourg must have its legal address in Luxembourg.
standard (maximum) rate: 17%
standard (common) rate of 21%
Tax on dividend
Tax on interest
Tax on royalty
Singapore companies are obliged:
Luxembourg companies are obliged:
-to maintain the accounting and submit the tax returns;
-to maintain the accounting and submit the tax returns;
-to conduct annual audits if the company’s turnover for a financial year exceeds S$ 5,000,000;
-based upon the size of a company, to conduct the company’s audit;
-to annually submit unaudited financial statements to ACRA.
-to submit the financial statements to the State Companies Register;
-to furnish the reports on income and other financial statements.
Double Taxation Treaty
Exists with 70 countries, including Kazakhstan.
Exists with 66 countries, including Kazakhstan.
Thus, the basic advantages of Singapore and Luxembourg in terms of incorporation of a holding company in these jurisdictions are as follows:
·Favorable tax regime in the form of a reduced tax rate; release from the payment of corporate tax for a certain period; tax deductions, etc.
·No tax on dividends of a Singapore company, paid to the shareholders.
·A Singapore company is not an offshore company and, accordingly, causes no negative emotions when effectuating banking operations all over the world.
·Bank secrecy and confidentiality of information stipulated by the law ensure the protection of assets of a company in Singapore.
·No control over exchange operations and no limitations on profit repatriation from the country, to another bank account.
·The company’s incorporation does not require the lease of an office in Singapore.
·A non-resident company registered as a taxpayer on GST, obtain a state reimbursement.
·A non-resident company in Singapore has the rights (but not the obligations) similar to those granted to a resident company.
·Due to tax treaties executed with 69 countries, including Kazakhstan, losses of money in the course of money transfers are minimized.
·Low tax rates for certain holding companies.
·No tax on interest and royalty.
·Flexible corporate law.
·A permit to use the nominee shareholders and the nominee directors to ensure full confidentiality.
·The existence of the law «On Bank Secrecy»
·No Currency Conrol.
·Existence of tax treaties with 66 countries, including Kazakhstan.
As is obvious, both the jurisdiction of Singapore and the jurisdiction of Luxembourg have their own advantages for the establishment of a holding company. You get to choose. We hope this article will help you in making such choice.
 See Section 145(1) in the Singapore Companies Act (1963).
 See Article 43 of the Income Tax Act of Singapore.
 This rate applies if income is earned by a non-resident not as a result of its activity in or from Singapore. In case the activities are carried out in or from Singapore, the interest will be taxed at a standard corporate income tax.
 This rate applies if income is earned by a non-resident not as a result of its activity in or from Singapore. In case the activities are carried out in or from Singapore, the royalty will be taxed at a standard corporate income tax.
 Law of Commercial Companies of Luxembourg, 1915.