Tax Planning Strategy 186 | Holding Companies
Tax planning strategy 186
A holding company is a parent corporation that owns enough voting shares in another company to control its policies and management. A holding company exists for the sole purpose of controlling one or several other companies. Holding companies also exist for the purpose of owning property such as real estate, patents, trademarks, shares and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
The benefits of forming a holding company include:
- The holding company itself is protected from losses if a subsidiary company fails and goes into liquidation. The creditors of the subsidiary company have no claim against the assets of the holding company.
- Different company assets can be put in different subsidiary companies. For example, one subsidiary may own the brand name and trademarks, another real estate, another equipment, and another to operate the trading business.
- Subsidiary companies may be located and operate in a country different from that of the parent company. The subsidiary most likely has its own senior management structure, products and clients.
- Ability to reduce subsidiary costs by having the holding company providing certain centralized services such as finance, administration, marketing, financial systems, etc.
- Holding companies can raise equity capital and loan funds much easier and cheaper than an individual subsidiary company (as it provides investors and lenders with lower risk than a subsidiary company).
The tax advantages with holding companies include:
- Can apply the tax consolidation regime to wholly owned subsidiaries so that the losses of one group company are available to the whole consolidated entity. In addition, intergroup transactions are eliminated for tax purposes.
- Holding companies can be based in low tax countries. Pepsi for example, is based in Denmark as holdings companies pay no tax there.
- Franked dividends paid to the holding company are effectively tax free.
- The holding company can charge the subsidiary companies for services provided and shift profits (subject to arms-length transfer pricing prices being charged).
Specialist advice is required before establishing a holding company structure.
"You’d be stupid not to try to cut your tax bill and those that don’t are stupid in business"
- Bono: U2