The advantages of a Holding Company may not be very clear to the partners of a firm. In many cases, the partners are usually only concerned about their profits: how much, when and how they will receive their income (especially if they are not employees). How the firm or the group of firms of which they are a member of perform only affect them if there’s a loss in profits. However, companies shouldn’t be managed based on that statement, especially in the case of a family business.
The partners’ priority should be the continuity of the business and its expansion. In this way, the creation of a holding company when there are several companies involved becomes a magnificent solution to avoid conflicts. In the infographic below you can see the advantages of a holding company. Do you want to know all about it? Don’t miss this article!
- What is a holding company and what types are there?
- How is a Holding Company created?
- What are the advantages of a Holding Company for the partners?
- When is it better to create a Holding Company?
- The additional advantages of a Holding Company
- Tax advantages a Holding Company has as a model for organizing the net assets of a company
- The power of the organization
What is a holding company and what types are there?
A Holding Company is simply a commercial company that may be a limited or a public limited company, and that owns the shares of the rest of the companies of the group.
The Holding Company, on the other hand, has the following characteristics:
- Its main activity is the holding of stocks or participations in other companies.
- It must manage those participations or shares as an economic activity.
- It must own at least 5% of the capital of those companies.
- The Holding Company must have its own human and material resources.
With respect to the different types of Holding Companies there are, we can find the following:
- Pure Holding Companies are those that are created for the sole purpose of owning stocks in other companies.
- Mixed Holding Companies are those that own stocks in other companies, but also provide services, such as central administration, accounting and legal services.
How is a Holding Company created?
As we have seen in the previous section, a holding company is a mercantile company, so in order to set it up, a new company can be created or an existing one can be used.
In order to create a holding company from a new company, the following steps must be taken:
1. To request the negative certificate in the Mercantile Registry.
2. The partners have to transfer the stocks they own to the capital stock of the new company.
3. To get the approval at the General Shareholders’ Meeting of that transfer of shares or participations.
4. The drafting of corporate bylaws that must state:
- The activity of the holding company, which will be the holding of shares or participations.
- The regulation of the way of controlling and managing the company.
- The way in which the distribution of dividends will be made.
- The conditions of purchase and sale in the case of new members.
- The agreements that refer to the management of the stocks or participations.
5. To attend the signing of the incorporation of the company before a Notary Public.
6. The settlement of the corresponding taxes and the filing of the deed with the Mercantile Registry.
In the event that the holding company is created from an existing company, the holding company must increase its capital and issue newly created stocks.
What are the advantages of a Holding Company for the partners?
Broadly speaking, a holding company has three major advantages: security, a solid and reliable structure and lower tax costs. When a group of partners owns several companies, the situation can (and usually does) generate conflicts that can affect their continuity. This is common in family businesses with management groups made up of second and third generation partners: the family grows, and with it, the number of partners.
In order to avoid conflicts in decision-making, to reduce the tax cost of intercompany transactions and to give a solid and up-to-date image of the group, the creation of a holding company is the most appropriate solution. In other words, the holding company is the umbrella that protects groups of companies from risks, disagreements and cost overruns.
When is it better to create a Holding Company?
The approach to create a Holding Company begins when a group of shareholders owns more than one company. This situation usually generates significant problems, especially in the long run, which, if not addressed, can lead to the end of the business activity. In general, problems arise for the following reasons:
- Confrontation between working and non-working partners: those who only want profits versus those who want to reinvest in the companies.
- Decisions may be blocked in the decision-making body: there may be certain partners with veto power who paralyze strategic decision-making processes for personal reasons or conflicts with other partners.
- Reinvesting the profits of one company in another has a high tax cost: it is very expensive.
- Business risk: it is not possible to withdraw cash surplus or assets (such as real estate) from companies without paying high taxes. If companies file for bankruptcy, such bankruptcy may result in the allocation of assets and cash surplus to creditors.
- In addition, if one company does poorly and another one does well, offsetting losses against profits is also very expensive.
- High costs and taxes.
- Limitations on the benefits related to the offsetting of losses among the companies in the group.
- Disadvantages in the deduction for reinvestment of extraordinary profits, when the reinvestment is made in another company of the same group.
- Confusion between family wealth and business capital.
- Applying for the tax consolidation regime for corporate income tax purposes isn’t an option.
A solution to every problem
The additional advantages of a Holding Company
- The decision-making process is simplified. This is because decisions can be taken by simple majority instead of requiring qualified majorities. In a holding company, decisions are normally taken by a simple majority (possible quorum 50.01%), reducing the veto power of a minority shareholders, which undoubtedly guarantees the future survival of the family business.
- Tax costs are lower. Money can circulate among the companies of the group free of tax, and it is possible to reinvest the profits of one group company in another, while losses can also be offset against profits under the tax consolidation regime, which has an immediate cash flow impact in favor of the group company.
- The capital gain is tax exempt. If in the future you wish to sell one of the group companies, the capital gain will be tax exempt if a series of conditions established by law are met. In this regard, Article 21 of the Corporate Income Tax Law establishes that dividends or shares in the profits of entities are exempt when a series of requirements are met, which are as follows:
- That the percentage of direct or indirect participation in the capital or in the equity of the entity is at least 5%. It is important to highlight that the wording of this section was modified and applies as from January 1, 2021. A limitation to the exemption is established and set at 95%. Therefore, dividends will be taxed at 5% which will mean that a tax rate of 1.25% will have to be applied.
- The corresponding share must be held uninterruptedly during the year prior to the day on which the profit to be distributed becomes payable or, in the absence thereof, must be held thereafter for the time necessary to complete such period.
- Additionally, in the case of shares in the capital or equity of entities not established in Spanish territory, the entity must have been subject to and not exempt from a foreign tax of an identical or analogous nature to this Tax at a nominal rate of at least 10% in the year in which the profits distributed or in which it participates were obtained, regardless of the application of any type of exemption, rebate, reduction or deduction on those profits.
- Improvement of the company’s image. A holding company provides a better image both before bank entities and before clients or suppliers. The holding company conveys solidity, professionalism and organization.
If these advantages convince you, do not hesitate to look for a good business consulting service to start planning your future. Leialta is a consulting firm with experts specialized in family businesses and in the creation of holding companies. We will provide you with all the information and advice you need at all times to create a solid, transparent and completely legal project.
Tax advantages a Holding Company has as a model for organizing the net assets of a company
Creating a holding company provides several advantages, among which the tax advantages are the ones to stand out, such as the following:
- Application of the exemption in the case of distribution of dividends between investee companies.
In the event that a subsidiary company distributes dividends to the parent company or Holding Company, the exemption may be applied, meaning it will not be taxed. In order for this to be possible, several requirements must be met. For example, the holding company must have at least 5% of the shares of the investee companies, or that the acquisition value exceeds 20 million euros. On the other hand, in these cases there is no obligation to withhold tax as there is when the shareholder is an individual and withdraws dividends.
- Capital gains tax exemption.
When a holding company transfers the stocks it owns of the investee companies, it will benefit from the total exemption in the capital gain, and therefore, double taxation in the corporate income tax will be avoided. In this case, the requirements for getting the exemption are the same as in the previous case: the percentage of participation must be at least 5% during the whole year prior to the transfer of stocks, or the acquisition value must be higher than 20 million euro.
- Application of the tax consolidation regime.
The tax consolidation regime is regulated in Article 55 of the Corporate Income Tax Law, and it implies that the group of companies is taxed as a single taxpayer, with the holding company being responsible for the payment of taxes. The application of the tax consolidation regime provides advantages such as the following:
- Intragroup results do not exist.
- It is possible to offset the losses of one of the group companies with the profits of another one.
- No withholding taxes will be applied to the payment of interest, dividends and other income.
- Bonuses are facilitated as well as other tax benefits, since the conditions of the groups are considered as a whole and not as individual companies.
- It is not necessary to provide documentation about the transactions related to the companies of the group.
In order for the special VAT group regime to apply, the holding company must have effective control over more than 50% of the capital or rights of the subsidiaries. In addition, the holding company must not be a subsidiary of any other company. There are two modalities for this regime:
- Simplified. In this case the companies of the group can compensate among themselves the balances of the liquidations to be paid, to be compensated or refunded.
- Advanced. In this case, the main benefit is received by the companies that carry out exempt transactions without the right to deduct VAT.
The holding company structure also makes it possible to take advantage of other tax benefits, such as exemption from wealth tax, the application of the 95% reduction in the taxable base for inheritance and gift tax, and the application of the exemption in the case of lucrative transfers in personal income tax.
If you want to create a holding company or restructure your group of companies to transform it, it is important that you have the help of a specialized business consulting firm to analyze your case and advise you on the best option to optimize taxation.
The power of the organization
There is no doubt that when a company is perfectly organized and its structure is transparent to its partners, everything flows smoothly and serious problems can be solved.
Holding companies are perfect for family (and non-family) businesses that are stifled by conflicts, disagreements between partners and high taxation.
Do you think that a holding company can solve important problems in groups of companies? Tell us what you think are the disadvantages and advantages of a holding company, leave your comment!
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