Personal Holding Company for Tax Planning
In this post, we will review how entrepreneurs and business owners can use foreign companies for tax optimization.
What is a Personal Holding Company
A Personal Holding Company means here a legal entity in which all shares are wholly owned by one person (the owner) who makes all critical decisions in this Personal Holding Company. At the same time, the owner can simultaneously perform the functions of a director, but this is not necessary.
Why do you need a Personal Holding Company?
Personal Holding Company is a continuation of the essence of its owner and can perform all the same tasks and functions, for example:
- Provide services to other persons, while the owner himself will provide the services;
- Have a bank account that will be managed by the owner;
- Have a brokerage account, own securities, and maintain investment portfolios;
- Own real estate, receive rental income, and pay real estate management fees;
- Be an official employer for the owner or even visa sponsor for him;
- Bear expenses directly related to commercial activities (travel expenses, purchase of equipment, etc.).
The advantages of Personal Holding Company
Residency
Unlike the change of citizenship, a legal entity can be registered in any country in the world. Registration in another jurisdiction allows, in a certain sense, to choose the legislation system or the game rules by which the company will live and work. For example, companies in many countries can engage in commercial activities in the field of cryptocurrencies, which is currently prohibited in some other countries.
Liability
The company (in the case of a company limited by shares), as a rule, has limited liability. If Personal Holding Company turns out to be bankrupt, the owner will be liable to creditors only in the amount of his contribution to the authorized capital, of course, if his actions were not aimed at bankruptcy. It is worth adding, however, that the bankruptcy of a Personal Holding Company is an unlikely scenario because it is never recommended to conduct risky activities directly through a personal holding.
Tax Regimes
Before establishing a Personal Holding Company in a certain jurisdiction, the owner has an opportunity to study in advance different tax regimes and choose the one that suits him, taking into account his characteristics in terms of expected income and expenses. For example, some countries do not tax the income that companies receive as a result of activities outside the borders of this country.
Expenses
The company has the right to reduce its taxable base for the amount of expenses directly related to its business activities. For an entrepreneur or digital nomad who operates through a company, this means that some expenses can be borne on behalf of the company, thereby saving on taxes. For example, a developer may establish a company and provide website development services through his company. The cost of buying a laptop or training courses in most cases can be attributed to the company's expenses and reduce the taxable base by their amount.
Thus, the creation of a Personal Holding Company has several advantages and provides the owner with freedom and flexibility in choosing the appropriate jurisdiction and tax regime for themselves.
Given mentioned features, the creation of a Personal Holding Company is a common tax planning tactic for entrepreneurs, business owners, and digital nomads.
It's no secret that the creation of foreign companies is also a common tax evasion tactic. That is why most states in the world have laws that impose certain obligations on their tax residents who establish companies in foreign jurisdictions. In most cases, such rules apply specifically to tax residents. This means that if the owners have lost their tax resident status in the home country and become tax residents in the new country, they should have an understanding of the rules of the new country's tax code.
AlphaLAW Estonia
Consider Estonia
One of the acceptable jurisdictions for setting up a Personal Holding Company is Estonia. The Republic of Estonia is also known as one of the most attractive destinations in Central and Eastern Europe for foreign direct investment, due to its phenomenal economic growth and progressive and innovation-friendly business environment, known for its liberal tax system, transparency, and ease of doing business, and the creation and implementation of various modern IT solutions and electronic services.
The peculiarity of the Estonian tax system is that the profits of companies are not taxed in the next tax period (quarter or year, for example), but only when distributing net profit as dividends. This regime is intended to encourage the reinvestment of net profit in business development or the acquisition of assets instead of distributing dividends. In Estonia, this approach to taxation has been used for more than 15 years. In Estonia, a company can have funds in any currency (including cryptocurrency) and easily make international payments.
Other countries
There are many more countries that seek to make their tax and financial systems beneficial to foreign citizens. We also recommend considering jurisdictions such as Romania, Andorra, and Portugal. Please note that among the countries described above there are no Switzerland, Cyprus, or Luxembourg, which have traditionally been considered reliable and attractive foreign jurisdictions. Indeed, these countries began to lose their attractiveness – each for its reason.
