The Use of Holding Companies

November 11th, 2021

office building for holding company

International Tax Reforms Challenge the Use of Holding Companies

Proposals under Base Erosion and Profit Sharing 2.0 (BEPS 2.0) and the Anti-Tax Avoidance Directive 3 (ATAD 3) challenge the use of holding companies. BEPS 2.0 may re-introduce withholding taxes while ATAD 3 brings in prescriptive requirements.


Beneficial Ownership from the OECD

Intermediate holding companies hold shares in subsidiaries. They are popular with private equity investors where they are used for investing in multiple companies, rather than holding interests directly via a fund partnership.

Only more recently has it been controversial for holding companies to take advantage of tax treaties in the countries of residence.

Starting with the Organisation for Economic Co-operation and Development (OECD) model treaty, the first challenge was in 2015. The EU took on the fight against the use of shell entities and arrangements for tax purposes; preventing intermediate holding companies from benefiting from reductions in withholding taxes under tax treaties and EU directives.

The introduction of the concept of beneficial ownership into the OECDs model tax convention in 1977 asked ‘who benefits from receipt of payment?’.

In 1986, the OECD’s report on conduit companies said such companies cannot be beneficial owner of payment if it is a fiduciary or administrator.

However, there was still no agreed definition of beneficial ownership in double tax treaties. The suggested international fiscal definition would result in an intermediate holding company having to on-pay its interest receipts, meaning it could not be the beneficial owner of that income. Essentially, suggesting that beneficial ownership was an objective test.


The BEPS and PPT

Action 6 of the OECD BEPS aimed to prevent the granting of treaty benefits in inappropriate circumstances and raised questions about subjective intent. The intent in the creation of the holding company structure was now considered important.

Minimum standards were proposed for double tax treaties to deal with treaty shopping.  The Principal Purpose Test (PPT) and a Limitation on Benefits test (LOB), or combination of the two would be required.

With the PPT, the benefit of the treaty is denied if obtaining the benefit was one of the principle purposes of the arrangement – unless granting benefit is in accordance with the purpose of the treaty.  In the 2017 model tax convention, the OECD gave examples that were acceptable.  One example given was a regional investment platform that employs a local team of managers and performs various functions. It is acceptable if the jurisdiction is chosen due to availability of directors, skilled workforce, membership of a regional grouping, and extensive treaty network.  The jurisdiction’s treaty network is part of wider considerations so the PPT is satisfied.



In February 2019, the Court of Justice of the European Union (CJEU) ruled on the interpretation of EU parent-subsidiary direction and EU interest and Royalties Directive. In Denmark, the CJEU decided that national tax authorities should refuse to apply the EU directives, meaning that domestic withholding taxes apply when the recipient is a conduit company.

Previous decisions suggested that tax-motivated reasons for structures would not stop the taxpayer exercising an EU law right, except when the structure is entirely artificial. In Denmark, the CJEU is taking a broader interpretation considering physical presence and whether the holding companies have economic enjoyment of the income received.

The Denmark decision uses several ideas from EU anti-abuse provisions such as beneficial ownership, conduit companies, principal purpose, and substance. Bringing all previous provisions together as a single idea to defeat claims for relief from withholding taxes made by foreign holding companies.


The Third Anti-Avoidance Directive (ATAD 3)

The European Commission plan to bring in ATAD 3 in Q1 2022. This aims to fight shell entities and arrangements for tax purposes in the EU.

If an intermediate holding company is a shell entity, ATAD 3 may be a threat. The European Commission is focused on minimising tax via use of legal entities with no substance or real economic activities.

ATAD 3 will define substance for EU entities, based on levels of employees, premises, functions performed, and risks – although the specifics have not yet been given. Entities that fail to meet these standards will incur counteraction measures that will affect both the entity and wider group.

The European Commission say that target indicators of shell entities may include; lack of own premises, low number of employees, lack of own bank account, passive income as main source, and outsourcing of income generating activities.


Withholding Taxes Recent Revival

In the past few decades, international tax systems have been reducing reliance on withholding tax globally, creating treaties with zero or reduced rates. More recently, this trend has been reversed.  New types of withholding taxes have been introduced as tax authorities now aim to collect withholding taxes.

The OECD’s two-pillar proposal uses a new category of withholding tax – immune from treaty relief – as a counter-measure, where groups’ local profits are otherwise below the 15% minimum rate. This is referred to in OECD materials as the ‘subject to tax rule’.

National tax authorities are taking a tougher line on foreign holding companies, but there is no one standardised solution to the new regulations. However, BEPS 2.0 and ATAD 3 proposals suggest groups should look to monitor where they operate entities in low tax jurisdictions, and where they fail to meet EC criteria.

For more information on recent developments in international tax regulations, please contact Briars.

Kate Jolly

Kate co-founded Briars in 1991 with Andrew Brierley. She specialised in tax law and today continues to advise clients on international operations, particularly land, expand and exit! In her spare time Kate is a Past Master of the City of London Guild of Entrepreneurs and a Director of CCARHT (Cambridge Centre for Applied Research into Human Trafficking).