Five Ways to Benefit from a Holding Company

ABiLiTieS Trust Corporate Services Apr 9, 2019
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The majority operational businesses are set up in combination with a holding company. This while starting entrepreneurs try to save every penny. So there must be good reasons for the use of a holding company. We give you five ways to benefit.

Why are holding companies used?

Many operational businesses do not have individuals as direct shareholder. Instead operational businesses have a holding company as shareholder and these companies are in their turn owned by individuals.
In international structures, it is not uncommon to have even two holding companies on top of each other, whereby the holding company below the top holding company is called ‘intermediary holding company’.
For large corporates, holding companies might be used for organizational purposes. Majority of the entrepreneurs having medium and even small sized companies choose to use a holding company.

So there must be valid reasons for the fact that entrepreneurs so often use holding companies. Here, we have enlisted 5 good reasons.

1. Reduce Business Risk

A holding company can prevent that a bankruptcy of the operational company will affect all business assets.

It can be recommended to separate operational activities with high risk from valuable assets and activities with low risk. This can be realised by putting a holding company above the operational company.
The valuables to bring into a holding company are real estate, patents, trademarks and profits acquired from operational activities.

Activities that are suitable for a personal holding company are pension management or providing a mortgage for a house to the shareholder or a family member.

2. Extension from Income Tax Payment

When profits of an operational company are being distributed to an individual or profits are obtained by an individual from the sale of shares (capital gains) in an operational business, this will in most countries result to personal income taxation. Even in case it is the purpose to reinvest in new activities.
In countries that apply a participation exemption, there will be no taxation when an holding company holds owns the operational business. This prevents, or creates an extension, from personal income tax payment.

The entrepreneur will have more funds available for reinvestment in its businesses or building up a pension within a personal holding company.

3. Ability to set off Losses and Profits

An entrepreneur that directly holds more than one operational company can have a loss in one and a profit in the other company.

Adding a holding company on top of the operational companies allows in some countries the creation of a fiscal unity.

 

After the creation of a fiscal unity, the loss and profits can be set off between the companies being part of the fiscal unity.

4. In International Structures: Exemption of Capital Gain Taxation

In countries with favorable holding regimes, capital gains derived from participations are often exempted from taxation.

An entrepreneur, from a country where capital gains are taxed, could potentially benefit by using a holding company which is located in a country with a participation exemption provision.
In case of a sale of the operational activities, the holding company will sell the shares under the participation exemption. Any profits will not be taxed. Nowadays many countries have anti-abuse regulations in place.

Adding a holding company with the sole purpose of benefiting from the participation exemption, could lead to double taxation or penalties.

5. Exemption of Dividend Tax

In case of a distribution of dividends by a company to an individual, often dividend tax shall be paid which is thereafter credited in the personal income tax return.

For foreign tax payers, in some cases, there will be a tax credit, though often the dividend tax is a burden.
Adding a holding company located in a country without dividend tax or with attractive tax treaties will result into, no or low dividend withholding tax at distribution.

This can prevent or extend dividend tax payment. Also, there are anti-abuse regulations exist as mentioned under number 4.

From the Start

As a starting entrepreneur, you might not want to have a holding company simply because it brings extra company formation costs and yearly requirement for accounting and tax filing.

At the same time, it can be difficult or result to extra taxes when adding the holding company at a later stage.
There are so many advantages of having a holding company. Every entrepreneur is advised to start his/her business in combination with a holding company.
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