Traditional holding company locations must adapt to the changing global economy, or face stiff competition from jurisdictions eager to take their business.
Locations such as the Netherlands, Luxembourg and Ireland are all adapting their tax laws to encourage investment, but the rise of locations such as Latvia, should set alarm bells ringing for government officials eager to secure multinational taxpayers.
Latvia became the latest country earlier this year to join the race for attracting holding companies following amendments to the country's Corporate Income Tax Act.
From January 2013, Latvia will introduce a participation exemption regime under which capital gains on share transfers and dividend income will be tax exempt.
Also, unlike a number of other EU countries with competitive holding company regimes, Latvia will not impose any conditions regarding the holding period or holding capital required for taxpayers to qualify for the exemptions.
The participation exemption will not apply to dividends received from tax havens or to capital gains realised from transferring shares in companies located in tax havens.
Also, from 2014, withholding tax will not be levied on dividends, interest and royalties paid to foreign companies, except for those paid to tax haven entities.
However, it is likely to be a number of years before foreign investors will look upon Latvia in the same way as more traditional holding company jurisdictions.
While the efforts of Latvia are to be commended, this is only one example of increased global tax competition. Governments are eager for new business and direct investment and are doing their best to make their regimes as attractive as possible. This competition can take the form of lower tax rates or allowing holding companies to do more trading. Either way, taxpayers are the winners in this dash for investment.
Now is the time to stop and assess which location is best for setting up a holding company to see if you are taking advantage of the best regime for your business.
We hope the insights you gain from reading this publication will help you when dealing with your tax affairs.
International Tax Review