Tax is a key consideration for corporate location decisions, especially with regards to the selection of company domicile and the creation of subsidiaries. While much controversy rages over the issue of tax avoidance, research by Investment Monitor reveals only a small proportion of subsidiary activity is concentrated in low-tax jurisdictions or offshore centres.
Where are the top low-tax jurisdictions?
The Monitor Network’s multinational companies database includes 2,190 of the top multinational companies (MNCs) by revenue, counting how many subsidiaries they have and where they are located. Of the 216,898 subsidiaries found, 10,374 are situated in low-tax jurisdictions. This accounts for 4.8% of the total subsidiaries analysed.
Hong Kong is the most attractive low-tax jurisdiction for the top 2,190 MNCs to establish a subsidiary, with 4,159 subsidiaries set up in the special administrative region, accounting for 40% of subsidiaries established in low-tax jurisdictions.
Hong Kong offers attractive tax conditions, with the tax rate for the first $2m of assessable profits lowered to 8.25% for corporations and 7.5% for unincorporated businesses rates. Assessable profits above $2m are subject to a tax rate of 16.5% for corporations and 15% for unincorporated corporations. The Heritage Foundation ranked Hong Kong as the second-freest economy in the world in 2020 and its access to mainland China also provides benefits.
The leading Hong Kong-headquartered MNCs have set up 1,261 subsidiaries within the special administrative region, accounting for 30% of the subsidiaries established there by the top 2,190 MNCs.
The Cayman Islands is home to 20.3% of subsidiaries established in a low-tax jurisdiction. The country requires no corporate tax or direct taxes for residents.
Investors from the US are drawn to low-tax jurisdictions
Of the top 2,190 MNCs, those from the US were most attracted to low-tax jurisdictions, with US MNCs setting up 3,474 subsidiaries in locations that benefit from preferable tax rates. MNCs from Hong Kong and the UK are among the most attracted to low-tax jurisdictions. Together, MNCs from the US, Hong Kong and the UK account for 61.5% of the top MNCs that established a subsidiary in a low-tax jurisdiction.
Low-tax jurisdictions attractive to financial services investors
Financial services MNCs have established the most subsidiaries in low-tax jurisdictions, setting up 3,104. Construction companies from the top MNCs are also attracted to these destinations, with 1,899 subsidiaries established.
Together, financial services and construction MNCs have established 48.2% of all subsidiaries set up in low-tax jurisdictions.
The top ten MNCs locating subsidiaries in low-tax jurisdictions account for 20% of all subsidiaries established in such locations. These companies are dominant in the financial services and construction industries.
Low-tax jurisdictions can offer favourable conditions for investors to establish a subsidiary, and while appealing to global companies, our analysis shows that local companies are often attracted to low-tax jurisdictions close to their headquarters. Hong Kong companies account for nearly one-third of the top MNCs that set up a subsidiary in Hong Kong and similarly the top UK MNCs accounted for 67.2% of subsidiaries in Jersey. While the pull factor of low tax can be an important aspect for a company, it isn’t the only factor that investors consider before establishing a subsidiary.