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Holding companies
A holding company is a business that owns the stock of other companies in a way that allows it to control the decisions and policies of these companies. In other words, a holding company is the top tier in a hierarchy of companies.
A holding company can take one of a number of legal forms, and may be a corporation, a limited liability company or a limited partnership, depending on the jurisdiction and the aims of the company. A holding company is not obliged to own 100% of the subsidiary's stock — the actual percentage required is determined on a case-by-case basis, but the minimum is most often set at 50% + 1 share, i.e. the majority of shares. In some jurisdictions, the percentage of the stock owned by a holding company can influence tax procedures. In the USA, for example, a holding company must own 80% of its subsidiary's stock to be eligible for tax-free dividends and other tax benefits.
A holding company presents a certain benefit in that it is protected from losses. So, if one of the companies in which the holding company owns shares goes bankrupt, this loss does not affect the holding company. Holding companies also allow you to protect your confidentiality, as authority and decision making are centralised.
Functions of a holding company
The main function of a holding company is to minimise risk by dividing assets between various subsidiaries. That is, it is not established with the aim of producing and/or distributing goods and services (as is usually the case), but to structure a group of companies in a way that minimises risk.
This is achieved by limiting the scope of liability for the holding company itself and for each of its subsidiaries. For example, one subsidiary might own real estate on behalf of the holding company, another might handle intellectual property and a third might manage branding, etc. Thus, the different assets of the holding company are divided, and if one of subsidiaries fails and goes bankrupt this will not endanger the holding company or its other structural components, as they are not legally liable for the losses of subsidiaries. The primary function of a holding company is, therefore, to manage the actions of its subsidiaries.
Benefits of establishing a holding company
As we have discussed, the main reasons for establishing a holding company are:
- Centralised management and control over several subsidiary companies
- Protection of assets (real estate, vessels, yachts, IP property, etc.)
- Privacy of beneficial owners: Those who prefer to avoid nominee directors and shareholders’ institutes may choose to place a shareholding company in the jurisdiction in which shareholders' registers are disclosed.
- Tax optimisation: Distributing dividends to a well-chosen holding jurisdiction can reduce or even entirely eliminate withholding tax. Click here to read more about taxation for holding companies.
Holding subsidiary shares
The most popular application of holding companies is shareholding (or subsidiary/dividend holding), i.e. where one company holds all or some of the shares of another company (or several other companies). In this respect, there are two taxation issues to be considered:
- Taxation of incoming dividends (income received by a shareholding company from its subsidiary(ies))
- Taxation of outgoing dividends (income distributed from subsidiary(ies) to the shareholding company)
In exploring these issues, you are bound to come across such notions as participation exemption, capital gains tax issues, double taxation treaties and the EU Parent-Subsidiary Directive. Contact our specialists now for more information.
Holding company registration
Registering a holding company is no different from registering any other type of company. By definition, a holding company is distinguished from other companies by virtue of the fact that it owns the stock of other entities, which means that a holding company is not a separate business structure in the legal sense.
As mentioned earlier, a holding company can take any legal form, and may be a limited liability company, a corporation, etc. Therefore, registering a holding company requires the usual set of documents, with some variations amongst jurisdictions: a memorandum, the company’s articles of association, details and personal information relating to the shareholders and owners, registered addresses, etc.
To find out about the registration requirements in the jurisdiction of your choice, please contact Confidus Solutions.
Most popular holding jurisdictions
Taking into consideration aspects like tax regime, substance requirements and confidentiality, we would strongly recommend that you choose one of the following jurisdictions for your holding structure:
Malta: Dividend income can be 100% exempt of corporate tax, if the Maltese company a) holds at least 10% of the shares of the foreign subsidiary, or b) invests more than EUR 1.5 million in its subsidiary. Note that the subsidiary company must also either a) be domiciled in the European Union, b) pay at least 15% corporate tax in its country of domicile or c) generate its revenue mainly from trading activities.
The Netherlands: The Dutch B.V. offers a great holding regime, with no minimum period for holding shares, no corporate income tax on dividend income and no capital gains tax from the sale of shares. However, you must adhere to a number of participation exemption rules: foreign subsidiaries must either a) be trading companies, or b) pay corporate tax of at least 10% in the countries where they are registered.
Singapore: Corporate taxation in Singapore works on a one-tier basis, meaning that the 17% tax on corporate income is charged once and is final. Dividends distributed to shareholders are therefore not subject to additional withholding tax.
We want you to fully understand the benefits and requirements of any jurisdiction you might be considering for holding shares or assets. Confidus will help you choose a holding jurisdiction that is right for your business — contact us now!
Top three famous holding companies
As of 2016, the world’s top three holding companies by trade revenue are:
- Kraft Foods Inc.
- The Coca-Cola Company
- American Express Co.
Kraft Foods Inc. is a food and beverage holding company with a revenue of 54.365 billion USD. It was initially founded as a holding company with interests in the US ice cream market, before gradually expanding into many other sectors. It currently (2016) owns 124 companies from various sectors as subsidiaries, making it one of the largest holding companies in the world.
The Coca-Cola Company is a syrup and non-alcoholic drinks holding company with a revenue of 44.294 billion USD. It is best known for its brand drink, Coca-Cola. The holding company itself, and its subsidiaries, are mostly focused on producing syrup bases for their drinks, which are then sold to a number of other companies that hold a Coca-Cola bottling license for producing the drinks. Some of these bottlers are independent, while some are owned by the holding company, comprising a separate tier of subsidiaries.
American Express Co. is a financial services holding company with a revenue of 34.44 billion USD. Its signature product is the American Express credit card, the fourth most popular credit card in the world. It became a holding company in 2008, driven by the ongoing financial crisis, which made the business eligible for certain types of government aid. This allowed it to maintain its strong position even in the midst of international economic instability.