Holding Company 2018-12-03T14:09:27+00:00

Holding Company

Why to Register a Holding Company

Multinational companies may decide to establish a holding company for a range of reasons. For example, a holding company may be an efficient vehicle to own shares of other companies to form a corporate group, to allow the reduction of risk for the owners and thus allow the ownership and control of a number of different companies or, amongst others, to provide tax efficiency in relation to withholding taxes on dividends and taxes on capital gains.

Advantages and Disadvantages of
Holding and Subsidiary Companies

Advantages

There are certain advantages to acquiring a controlling interest in a subsidiary as a holding company.

The most important ones include:

The capability of controlling operations with a small percentage of ownership, thus lesser up-front investment;

Holding companies can take risks through subsidiaries, thus limiting this risk only to subsidiaries instead of placing the parent company on the line;

Expansion can occur through the way of simple stock purchase in public market, which shuns the difficult step of obtaining approval from the subsidiary’s board of directors;

Disadvantages

However, there are also some disadvantages associated with holding companies model. These include:

If less than 80% or 90% of the stock is owned by the parent company, the holding company can eventually pay more taxes, depending on its company of registration’s rules.

A holding company can be required to dissolve more easily as contrasted to a single merger operation.

Moreover, there are possibilities of a holding company to expand through the use of debt or leverage, building an intricate corporate structure which can include unrealized values, thus creating a risk if interest rates on obligations or the evaluation of assets posted as guarantee for loans alter radically.

Finding the Right Location for a Holding Company

Choosing the appropriate location for a holding company is a complex procedure—involving consideration of business, economic, logistical and operational requirements.

Choosing the right jurisdiction for a holding company, you need to consider (a) taxation of incoming dividends; (b) corporate income tax on received dividends; and (c) taxation of ongoing dividends.

Incoming dividends from a subsidiary company must be either exempted from withholding tax or be subject to a reduced tax rate (i.e. 5%-10%); this can be achieved by having a DTA (Double Taxation Agreement) in place – a convention for avoidance of double taxation, between the state of the parent company and that where the subsidiary is located.

If the parent and subsidiary companies are located in the EU member states no withholding tax is levied on such dividends from the subsidiary according to the EU parent/subsidiary directive. This rule applies where the parent company holds more than 10% of stake in its subsidiary.

On the other hand, it is vital that the holding jurisdiction, where the funds will be received as dividends, be exempted from corporate tax or reduced through tax credit method.

The Netherlands, as an example, apply the “participation exemption rules”, to exempt incoming funds from the subsidiary, from taxation on the parent company level. Nevertheless, this “participation exemption rules” apply if the following conditions are met: the Dutch holding must own at least 5% of shares of its subsidiary, such shares must be held from the beginning of fiscal year, the subsidiary profit must be taxed, the parent company must be actively involved in the business of its subsidiary, and the subsidiary must not be a ‘tax exempt portfolio investment company’.

If the beneficiary is domiciled in different jurisdiction than the holding jurisdiction it is of the essence that the ongoing dividends are subject to low tax rate. As it has been seen above under the EU parent/subsidiary directive no taxes will be levied in the dividends flow within the EU jurisdictions. Another option is to choose a jurisdiction with an extensive network of DTAs or even a jurisdiction where taxes are paid only once and on the company level, i.e. no withholding taxes are levied on the outgoing dividends.

Advantages of a Subsidiary Company

The holding company provides the subsidiary company with buying power, research and development funds, marketing money and know-how, employees, technical expertise and other features which otherwise it could not afford or accomplish alone.

The parent can provide the monetary means and capability to jump start new companies and products.

Ability to offset profits and losses of one part of a business with another;
Liabilities and credit claims are locked in that subsidiary and cannot be passed on to the parent company;
Allows for joint ventures with other companies, with each one owning a portion of the new business operation;

Disadvantages of a Subsidiary Company

A major disadvantage of being a subsidiary of a large organization is the limited freedom in management

Decision making can become time consuming as issues often must go through various chains of command within the parent bureaucracy before any action can be taken.

Legal paperwork involved with creating a subsidiary can be lengthy and expensive

Control also becomes an issue when a subsidiary is partially owned by another outside organization.

Tax Reasons to Set Up a Holding Company

A holding company usually collects the dividends (profits after tax) of the subsidiary company as free from tax as possible and does not tax pure participation profits.

In addition, further distributions from the holding companies usually only have a lower tax levied on them or, in other and best case scenarios, they are full tax exempted – no tax on dividends being paid to the shareholders of the holding company or umbrella company.

In addition, Holding companies can substantially reduce the taxable profit of the subsidiary companies, by invoicing the subsidiaries in respect of their activities, same also applying in the case of holding companies holding industrial property.

Holding Company in the European Union

In case the subsidiary companies are located within the European Union, then, and also as a standard rule, a Cypriot, Dutch, Luxembourg, Spanish or UK Holding company will be suitable due to the EU parent-subsidiary directives – tax-free collection of dividends, provided that the preconditions of the parent-subsidiary directive are met, with respect to the value of the stake and the period for which it is held.

Cyprus and Netherlands, in particular, have a so-called holding privilege, which means there will be no taxation of proceeds purely from holdings.

Cyprus offers further benefits in this connection, considering it will be tax exempted at source in the event of further distributions to non-Cypriot owners, and even under non-DTA circumstances, active income is taxed at a rate of only 12.5%.

Other Countries
Where to Register a Holding Company

Other countries such as Switzerland, the United Arab Emirates (UAE), certain offshore countries or Singapore may also be suitable as the location for a holding company.