Future of holding companies (2023)

Rogério Bittencourt

Mattos Filho, Rio de Janeiro

rogerio.bittencourt@mattosfilho.com.br

Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London

Tuesday 17 January 2023

Session Chair

Philip van Hilten AKD, Amsterdam

Speakers

Jemma Dick Clifford Chance, London

Guilhèm Becvort Allen & Overy, Luxembourg City

Philip Tully Matheson, Dublin

Ron Nardini Vinson & Elkins, New York

Ryan Rabinovitch Fasken, Montréal

Michel Collet CMS Francis Lefebvre, Paris

Anton Akimov AKD, Amsterdam

Introduction

The panel was organised in a participative and stimulating way, and aimed at gathering the view of each panellist and the delegates regarding several hot topics, with provocative questions and true or false statements involving the future of holding companies.

The topics covered included: active and passive holding companies; the impact of European Union directives on these structures; substance requirements of Anti-Tax Avoidance Directive (ATAD) III and new domestic rules; the debt-equity bias reduction allowance (DEBRA) proposal; and beneficial ownership rules, as well as their impact on financing and funds.

Panel discussion

The session chair, Philip van Hilten, started by addressing the panellists with the following questions: 'From the death of holding companies to what does the future hold for holding companies: are we more optimistic than in 2022?'

Philip Tully commented from the Irish perspective, pointing out that since the inclusion of beneficial ownership rules in tax treaties, the substance of Irish holding regimes has been questioned, and this has been catalysed by all EU tax law developments (ATAD, Payment Services Directive (PSD) and ATAD III discussions). Tully saw a possible shift from a more objective substance test to a more subjective approach, which is challenging due to the possibility of different views on what constitutes a sufficient degree of substance.

Michel Collet argued that there is a future for holding companies and the question is how each jurisdiction will regulate them. Then van Hilten invited other delegates to make comments.

Guilhèm Becvort pointed out that Luxembourg has quite flexible legislation for holding companies established in the jurisdiction, including a participation exemption and wide treaty network, which may be affected by new treaty and EU substance rules. However, so far, Luxembourgish regimes are demonstrating good resilience to new rules.

Tully added that company law considerations and listing concerns can also affect the choice of jurisdiction for setting up a holding company. Ryan Rabinovitch commented that treaty principal purpose test (PPT) rules and the number of jurisdictions in which the multinational operates may also impact this choice.

Jemma Dick pointed out that there are several non-tax reasons for setting up a holding company, so she believed that there is a future for such companies. Ron Nardini, on the United States side, added that he believed that it is most likely that there will be movement toward the consolidation of multinational groups.

Rabinovitch and Tully commented that commercial and company rationales influence the setting up of holding companies, which may be useful for the application of treaty PPT clauses.

The next topic suggested by van Hilten was a question to panellists on whether holding companies without adequate substance could survive in the near future.

Nardini argued that there is no clear definition of 'holding company' or 'substance,' and that if there is a good business reason for incorporating a company, some substance requirements (eg, to have a certain number of employees) may have lower importance; for example, investment funds that aggregate funds for investments and have no employees or a low number of them.

Becvort expressed his opinion that a holding company with no substance cannot survive, but the question that remains is what the holding requires to have substance considering the nature of its activities.

Collet added that the substance question is often related to abuse of law, beneficial ownership, location of production and so on, and that there are two possible approaches to evaluating it: a test based on objective factors (employees, operation and offices) and a subjective approach, that is, subsidiary, which relates to the purpose of the company itself. ATAD III aims at creating a minimum substance requirement, and to apply it, artificiality should be avoided.

Then van Hilten asked the panellists whether the following statement is true or false: 'For the tax authorities, a holding can never have enough substance.'

Rabinovitch argued that he believed that this view is true in many instances and referred to a treaty shopping case of the Canadian Supreme Court involving the application of the PPT clause after the multilateral instrument (MLI) as an example of the rigid approach taken by the Canadian tax authorities.

Nardini added that it depends on the facts about the circumstances of each situation under analysis. Tully pointed out that substance tests should apply safe harbours and more ingredients, which could be helpful for establishing a certain degree of certainty.

Dick believed that even fulfilling the substance requirements may not suffice regarding fulfilling beneficial ownership tests or other rules for some tax authorities. Rabinovitch agreed and added that, for the application of PPT clauses, having substance would not be sufficient.

The Chair then submitted another true or false statement to the panellists on whether it is true that a holding company does not require much substance because it has a limited function.

Van Hilten asked about the participants' opinions on whether having a 'master holding' or investment platform would be helpful for providing substance to special purpose vehicles (SPVs) or holdings from the Luxembourgish, Irish and French perspectives, and what would be the impact of MLI on this (mainly treaty PPT clauses).

From the Luxembourgish perspective, Becvort commented that it is quite common to have master holding companies on top of layered structures, not only for tax reasons but also for investment risk reasons, for example. He believed that if there is a regulatory or legal incentive for their creation, it could be a good way of organising multinational businesses.

Nardini agreed and added that, depending on the setup, another thing to consider is the fact that different tests may exist in each jurisdiction involved. Anton Akimov commented on a Dutch case involving a Belgian holding company that invested in a Dutch company and was considered to have no substance, and whether it would be possible to have a master holding under ATAD III investing in such a company. Rabinovitch pointed out the possibility of such a company being looked at through the application of tax treaties.

Van Hilten raised the question on how to address the alleged artificiality of functions and business activities. Nardini argued that if the holding company has sufficient employees and can provide evidence that they work for the holding company, it could expect to be considered 'substantial'. Collet, in turn, pointed out that ATAD III requires proof that employees work actively for the benefit of the holding company.

Van Hilten asked the panellists whether the qualifying asset holding company (QAHC) is the expected 'phoenix' of holding companies, and the ultimate future of Luxembourg and Irish regimes. Dick argued that this is optimistic with the success of the QAHC, but did not expect that it represents the end of Irish and Luxembourgish holding regimes. Dick also added that the regime does not include specific substance requirements. From the Luxembourgish perspective, Becvort pointed out that he sees a tendency to use the British QAHC as a complementary regime for multinational investment structures. Tully added that Ireland introduced the investment partnership regime to try to boost such a market and he expected more competition among these jurisdictions in the future.

Nardini was asked by van Hilten whether he believed that the US is attractive for holding companies and whether substance rules play a part in this choice. Nardini argued that the US is 'too creative' in terms of tax legislation covering international investment, which makes it more difficult for multinationals to have a holding company in the country to make investments abroad.

Nardini also highlighted that, on the other hand, to invest into the US, you only need to satisfy treaty limitation of benefits (LOB) tests, and there is no substance requirement, which makes it less complex for taxpayers to invest from abroad. There are only a few exceptions, such as US limited liability companies (LLCs) investing in Brazil.

Conclusion and final remarks

The session was concluded by van Hilten asking the panellists to make their concluding remarks. Tully started by pointing out that he believed the trend of combatting treaty shopping and the lack of substance will continue, and that multinationals are reviewing their structures to adapt to such realities, for example, by consolidating companies where they do not have enough substance.

Rabinovitch continued by stating that recent rules (ATAD, PPT and beneficial ownership) will eventually incentivise group consolidation and mergers, despite that fact that a certain consensus is still needed. Nardini saw a tendency for investment funds to leave tax haven jurisdictions and go to jurisdictions where they have substance, and believed that the United Kingdom will be a possible destination for them. Dick thought that substance is 'here to stay'. Becvort saw a challenging future for holding companies in combining substance rules, ATAD 3, PPT rules, ATAD I and II, and regarding how to allocate business substance. Collet, in turn, forecasted tax certainty challenges regarding how to prevent disputes relating to substance requirements on a case-by-case basis. Akimov contributed by saying that multinationals are preparing for ATAD III, and trying to get more substance in their holding companies in the Netherlands by reorganising groups through consolidations and mergers.