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Case Study 7 Holding Company

Updated time: Jul 28, 2018 , 12:36 (UTC+08:00)

Oscar Valdez, a Mexican high-net-worth individual is planning to invest in new recreational and tourist facilities (spa resort, golf links, holiday cottages, restaurant etc) in Portugal. Mr Valdez is interested in structuring his investment in such a manner that:

A. the assets wholly or partly owned by him in Portugal are well-protected against various business, economic or political risks; and

B. the return of his investment after the commencement of the business operations is tax effective.

Suggested solution:

Mr Valdez could split the business operations and the real estate by setting up separate companies for the various business operations and for the real estate. The real-estate companies are then renting out the property to the operational companies.

The rental income will be subject to corporate tax in Portugal at a rate of 28%, regardless of whether the real-estate company is resident in Portugal or not. Additional taxes will be due if the real-estate companies are established in "blacklisted" offshore jurisdictions. During the development phase, the operational companies will have accumulated losses. If the real-estate companies are resident in Portugal, both the real-estate companies and the operational companies can be held by a Portuguese holding company. In this way, the entire group can claim group relief under Portuguese law, as a result of which the profits of the real-estate companies can be offset against the initial losses of the operational companies, thus minimising exposure to Portuguese tax.

If the Portuguese holding company is owned by a foreign holding company under such conditions that dividends will not be subject to:

  • withholding tax on dividends;
  • corporate income tax upon receipt by the holding company (or are qualifying for a credit for Portuguese underlying taxes); or
  • withholding tax on dividends paid by the holding company;

this would result in an effective tax-planning solution. The effectiveness is further increased if the international holding company is owned by an IBC or a

tax-exempt company in an offshore jurisdiction.

These conditions would be met if the Portuguese company is owned by a UK holding company, the latter being owned by a company on the BVI, as illustrated by the diagram below.

Note: A holding company in, for example, Cyprus, would not work as long as Cyprus is blacklisted under Portuguese law.

Trust Formation & Asset Protection Case Study 7 Holding Company