One Business, Three Jurisdictions: How Global Groups Can Structure Ownership, Investment and Operations Across Borders

An international business rarely takes the form of a single, monolithic legal entity. As the group grows into new markets, attracts new investors or acquires new assets, the question arises of where the different companies should be based. The implications cut across ownership, investment, taxation and liabilities.

 

A possible answer is a parent company in the United Arab Emirates (UAE), a regional holding company in Singapore and operating subsidiaries in the key markets where the group does business. The parent could own the group as a whole while the Singapore entity could hold investments in different Asian businesses, while the local subsidiaries could undertake day-to-day operations and employment.

 

Such a structure can make commercial sense, particularly for a group that operates across the Middle East and Asia. But it is not the only answer: every company must have its purpose, and the structure must be examined in the context of the relevant laws and requirements.

 

The crucial question is not how many companies a group should have, but whether each one is fulfilling a purpose.

 

Separating Ownership From Operations

 

The most basic distinction is between owning a business and operating it. A parent company can own shares in other groups, manage its assets, and exercise its rights as a shareholder. An operating company can engage in the day-to-day activities with customers, suppliers, employees and regulators. In between, a holding company can own shares in a particular business or region.

 

The distinction is not always absolute, but it can simplify the management of a complex group structure. A company that owns and operates a factory, for instance, is likely to be subject to employment claims, product liability and regulatory demands. Creating a separate holding company to own the shares in the operating company can shield the parent from some of these risks.

 

It does not eliminate all risks: creditors can often look to the assets of the company that owes them money. Guarantees, security interests, insufficient capitalisation or the failure to operate separate companies can create liabilities. Courts can pierce the corporate veil when transactions have been structured to avoid obligations or obscure the relevant commercial realities.

 

Holding companies are not a guarantee of safety for subsidiaries, nor are any other corporate form. They are subject to the relevant laws depending on their location, organisation and activities. In general, a subsidiary can only protect itself against the liabilities of another company if it does not deal with its creditors directly and has no other obligations.

 

For an international group, the goal is to organise its activities in a way that reflects its purpose, not a structure that creates the appearance of separation without substance.

 

Why A UAE Parent May Make Commercial Sense

The UAE has become a popular location for businesses seeking to operate within the Gulf, the Middle East and international networks of investors. A parent company based in the UAE can serve as the ultimate holding company, providing governance, financing and strategic direction to the group, depending on its form, licence and activities.

 

The choice of the company's form is critical: a company incorporated in main UAE is subject to different laws than one incorporated in a free zone such as the Dubai International Financial Centre or Abu Dhabi Global Market. Free zone companies have different rules, restrictions and permitted activities.

 

A group considering a parent company in the UAE should consider where its directors will be based, which entity will own the intellectual property, how the funding will take place and whether the proposed activities are permitted or licensed. Tax rules also play a role: a parent company in the UAE may generate income from dividends, interest or other forms of investment income from its subsidiaries.

 

The UAE corporate tax regime in particular has important implications. A qualifying free zone person may benefit from a 0% rate on qualifying income if the relevant requirements are met. However, it is not always the case that a free zone company benefits from a 0% tax rate on all forms of income: it depends on the tax rules for the relevant category of income, and the requirements for qualifying income.

 

The location of a parent company should reflect the underlying commercial realities rather than assumptions about tax benefits.

 

Singapore As A Regional Holding Platform

Singapore is often considered by groups that operate investments and businesses across Asia. Its corporate laws, financial infrastructure, network of treaties and access to professional services can make it a useful location for a regional holding company.

 

In the proposed structure, a Singapore company could own the shares of several operating companies in different Asian markets. It could provide a platform for regional investment and management, taking in dividends and deploying capital in acquisitions, investments or operating companies, depending on the group's strategy and the relevant laws.

 

There are other considerations, starting with taxation. Singapore's rules regarding foreign-sourced income, exemptions, deductions and withholding tax apply depending on the source and type of income, and the conditions that must be met.

 

A company incorporated in Singapore is unlikely to be exempt from taxation on dividends, interest or other forms of income simply because it is located there. Its residence for tax purposes may also be relevant: a company's seat and tax residence are not always the same.

 

In general, Singapore's rules on corporate tax residence focus on where a company is effectively managed and controlled, looking at the relevant facts and circumstances. Board meetings, decision-making powers and the actual operation of the business can all be relevant.

 

A Singapore holding company that is managed and controlled elsewhere could find that it does not benefit from the same rules, or that its residence is not in line with its purpose or the application of relevant treaties. The structure needs to be justified on its merits.

 

For an international group, a Singapore holding company can be a useful structure. It is not one that always applies: costs, local tax rules, regulatory requirements and the question of whether the added layer of complexity creates value have to be taken into consideration.

 

Mapping The Flow Of Capital And Income

A multi-jurisdictional structure should be designed with a view to the flow of capital and income. The relevant categories include equity, shareholder loans, dividends, royalties, management fees and payments for goods or services. Each has its own implications, including its residence for tax purposes, potential exemptions or deductions, and any applicable withholding taxes.

 

For instance, the UAE parent company could finance the Singapore holding company, which could finance the operating subsidiary. The investment can take the form of equity, debt or a combination of the two, with its own rules in terms of documentation, taxation, transfer pricing and other considerations.

 

Debt financing can create obligations to repay, and to pay interest on the loan. These obligations can fall under different sets of rules, depending on the relevant domestic laws for borrowing, lending, taxation and other considerations. Interest deductions may be restricted, depending on thin capitalisation rules, earnings-stripping limitations or other domestic restrictions.

 

Intercompany transactions can be subject to withholding taxes, reporting obligations and other requirements. A tax treaty may reduce the rate of withholding tax, but only if the relevant requirements apply.

 

Dividends, meanwhile, involve considerations on both sides of the transaction. The operating subsidiary may be subject to rules in its jurisdiction regarding dividends, such as a withholding tax on payments to its shareholder. The tax treatment in the holding company's jurisdiction may be equally relevant, as may the parent company's rules on foreign dividends and participation exemptions.

 

Other considerations include foreign exchange controls, banking documentation, requirements regarding beneficial ownership and any restrictions on capital movements. A payment that is allowed under company law can encounter difficulties under tax, exchange control or banking rules.

 

A capital flow diagram is useful, but it has to be accompanied by a detailed analysis of the tax and legal implications of each transaction. The purpose, documentation and treatment should be consistent across the group.

 

Substance, Transfer Pricing And Treaty Access

 

Intermediate holding companies have come under increased scrutiny by tax authorities around the world. Regulators are examining whether the owners of cross-border income have an economic interest in the activities, and whether the rules of transfer pricing apply.

 

The latter is of particular relevance for management fees, intercompany loans, royalties and the supply of shared services. Related-party transactions must comply with the arm's-length principle where the relevant rules apply, examining the functions performed, assets used and risks assumed by each party to the transaction.

 

An operating subsidiary should not be charged large management fees simply because a parent company has issued an invoice. The group must be able to justify the services provided, the charges made and the benefit received where the rules require it.

 

The same applies to the ownership of intellectual property. A company may formally own a trademark or patent, but the economic benefits can be affected by development, enhancement, maintenance, protection activities and other factors across the group. Contractual ownership alone may not be sufficient to determine the allocation of taxable profits.

 

Treaty access is similarly complex. Tax treaties can be used to reduce or eliminate withholding taxes on certain forms of income, but only where the requirements apply. This may include tests related to residence, beneficial ownership, anti-abuse rules and other considerations.

 

Domestic laws and international standards may deny benefits where the arrangement does not reflect commercial realities or where it is designed to achieve a tax advantage. The relevant rules apply on a country-by-country basis: a structure that works in one treaty may not apply in another.

 

Local Subsidiaries Must Remain Fit For Purpose

 

The operating company in each market is often the final element. It typically has to comply with local incorporation, licensing, employment, consumer protection laws, data protection rules and regulations affecting its sector. It may need approvals, capital requirements or authorised management depending on the activity.

 

A group that sells software in one country, operates a logistics business in a second and provides financial services in a third cannot assume that the same form of ownership will apply in each.

 

Restrictions on foreign ownership, local participation and licensing requirements can dictate the choice between a subsidiary, branch, joint venture or other form of ownership.

 

The location of employees and customers can be relevant: a company organised outside the country can create tax or regulatory liabilities in another, depending on its activities, dependent agents, employees or other presence. The rules on permanent establishment are particularly relevant where a group operates activities without establishing a local subsidiary.

 

Operational considerations are equally important. The group needs to take into account who will sign contracts with customers, who will be responsible for employing staff, who will take possession of inventory, who will assume the risks and rewards of operations, and who will receive the revenue. If the contracts allocate responsibilities to one company and another carries out the operations, it can create disputes with customers, tax authorities, regulators or creditors.

 

It is not enough for the group to have the right structure on paper: it must reflect the realities of its operations.

 

The Right Structure Is The One That Can Be Defended

 

An international group must consider the alternatives before committing to one structure. One company may be sufficient for a group with limited overseas operations. A parent and several subsidiaries may be preferable to a parent, a regional holding company and several subsidiaries. A separate investment vehicle may be appropriate if the group has different investors, financing requirements, intellectual property or protection requirements.

 

Each option has its costs and benefits. They should be analysed with a view to the total costs of organisation, filings, auditing, tax returns, transfer pricing documentation, regulatory approvals and any professional advice. Considerations should include the entry and exit of investors, the financing of acquisitions or divestitures, and whether the structure allows for new markets without a complete overhaul.

 

Legal and tax advice should be obtained in each relevant jurisdiction before finalising a structure. It should cover corporate laws, tax residence, withholding taxes, access to treaties, transfer pricing, beneficial ownership, economic substance (where applicable), exchange controls and other requirements. The structure should be reviewed and updated as circumstances change.

 

A UAE parent, a Singapore holding company and a series of operating subsidiaries can be an appropriate structure for an international enterprise. Its value lies not in the number of jurisdictions on an organisation chart, but the allocation of ownership, capital and management that complies with the relevant laws.

 

For international investors, the best structure is not necessarily the most complex one. It is one where the commercial purpose is clear, the entities perform their functions and the tax and legal implications are appropriate as the business grows.

 

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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