Some businesses prefer creating a group structure in association with the ‘holding company’ for the purpose of tax efficiency and managing risk. Nonetheless, it is important to understand what a holding company actually is, how it changes the structure of an organisation, and how it benefits the business owner(s).
Holding company: An Overview
In simple words, a holding company can be considered as a parent organisation that plays a controlling role in single or multiple subsidiary companies. As per the 2006 Companies Act, Section 1159 (part 1), a “subsidiary”:
(a) holds most of the rights to voting, or
(b) is one of the members of it with the right to remove/appoint most of the company directors, or
(c) an independent controller or a member of it, as per the agreement with the rest of the members
Typically, a holding company can be inactive with regard to trading, however, at times they may trade themselves. Despite the fact that the words ‘parent company’ or holding company’ are commonly used interchangeably, the former usually indicates a more active role in trading compared to the latter.
Advantages of a holding company
Commonly, a holding company can be used for ‘holding’ any crucial assets under the control of a group of firms, for instance, shares, real estate in subsidiaries, and intellectual property. This is likely to minimize the odds of losing important assets in the event one or multiple subsidiaries fall into financial trouble, by ring-fencing each one of them.
Tax – Often, dividends may not be taxed on ‘small-scale companies’ as long as they pass between the holding firm and the subsidiary companies (commonly recognised as dividend exemption). If the holding company owns a minimum of 10 percent of shares in its subsidiary for 12 months consecutively, it is given the right to dispose of the shares without being accountable for CGT (capital gains tax).
Organisational structure – The holding firm has the right to bring together businesses of entirely different natures. This can be beneficial when working on additional business projects or acquiring multiple companies. For example, in the year 2015, Google established a holding company known as Alphabet Inc. A holding firm can likewise make a business structure clearer to potential investors.
Business sale – Certain companies might decide to sell off a specific component of their business. In such a scenario, multiple subsidiaries can be created in addition to the holding company, or any given subsidiary may even be sold wherever necessary.
Shared control and other functions – At times, it can be fruitful for a holding firm to orchestrate specific tasks, like accounting, from a subsidiary firm, collecting sales and handling tax matters of multiple companies under a group, or managing shared assets.
It is important to note that certain guidelines and exceptions do apply to the various tax exemptions. Hence, professional help must be sought whenever necessary.
Creating a holding company
You can set up a holding company in the same way that you set up any other limited company in the private sector. Nonetheless, it needs to have control over one or more subsidiary firms before it can be called a holding firm, as per the 2006 Companies Act.
We are able to help you form your holding company. If you need any help let us know.