Some businesses decide to create a group structure with a ‘holding company’ as a way of managing risk, and for tax efficiency purposes. But what exactly is a holding company, how does it change the company structure and what are the benefits?
What is a holding company?
A holding company is essentially a parent company which owns a controlling interest in a subsidiary company (or multiple subsidiary companies). According to section 1159 (1) of the Companies Act 2006 entitled Meaning of “subsidiary” etc:
(a) holds a majority of the voting rights in it, or
(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or
(c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it”
Holding companies are often inactive in terms of trading, but sometimes they will trade themselves. Although the terms ‘holding company’ and ‘parent company’ are often used interchangeably, the latter normally implies a more active trading role than the former.
What are the benefits of a holding company?
Holding companies are normally used to ‘hold’ any important assets owned by the overall group of companies, such as intellectual property, real estate and shares in the subsidiaries. This can reduce the risk of losing key assets if one of the subsidiary companies falls into financial difficulty, by ring-fencing them. Other benefits include:
- Organisational structure – a holding company can bring together disparate companies, which can be useful when acquiring other companies or creating multiple business ventures, e.g. Google created a holding company called Alphabet Inc. in 2015. In this scenario, a holding company can make the overall business structure clearer, which may help with investment.
- Tax – dividends are generally not taxed on ‘small companies’ if they pass between the subsidiary companies and the holding company (known as the dividend exemption). Furthermore, if the holding company has owned at least 10% of the shares in a subsidiary for a period of 12 consecutive months, it can then dispose of these shares without generally being liable for capital gains tax (known as the substantial shareholding exemption)*.
- Business sale – some companies may want to sell off a certain part of their business, in which case it is possible to create several subsidiaries along with a holding company, and to sell one of the subsidiaries.
- Shared functions and control – it is sometimes helpful for a holding company to orchestrate certain tasks, such as collecting sales and accounting data from the subsidiaries, managing the tax affairs of the group of companies, or to handle shared assets.
* There are various rules and exceptions to these tax exemptions and professional advice should always be sought.
How can I create a holding company?
Holding companies can be set up in the same way as any other private limited company is formed. However, it must essentially have control over at least one subsidiary company to be classified as a holding company under the Companies Act 2006.
Quality Company Formations can help you to create a holding company using one of our company formation packages.