Setting up your holding company – finding the right location
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Holding company formation
Why register a holding company?
TBA & Associates provides business incorporation and registration services to register holding company. We render the best registration and incorporation services with the goal that you begin maintaining your business easily.
Multinational companies may decide to establish a holding company for a range of reasons. For example, a holding company may be an efficient vehicle to own shares of other companies to form a corporate group, to allow the reduction of risk for the owners and thus allow the ownership and control of a number of different companies or, amongst others, to provide tax efficiency in relation to withholding taxes on dividends and taxes on capital gains.
Advantages and disadvantages of holding and subsidiary companies
There are certain advantages to acquiring a controlling interest in a subsidiary as a holding company. The most important ones include:
- The capability of controlling operations with a small percentage of ownership, thus lesser up-front investment;
- Holding company set up can take risks through subsidiaries, thus limiting this risk only to subsidiaries instead of placing the parent company on the line;
- Expansion can occur through the way of simple stock purchase in public market, which shuns the difficult step of obtaining approval from the subsidiary’s board of directors.
However, there are also some disadvantages associated with holding companies model. These include: if less than 80% or 90% of the stock is owned by the parent company, the holding company can eventually pay more taxes, depending on its company of registration’s rules.
A holding company can be required to dissolve more easily as contrasted to a single merger operation.
Moreover, there are possibilities of a holding company to expand through the use of debt or leverage, building an intricate corporate structure which can include unrealized values, thus creating a risk if interest rates on obligations or the evaluation of assets posted as guarantee for loans alter radically.
Finding the right location for a holding company
Incoming dividends from a subsidiary company must be either exempted from withholding tax or be subject to a reduced tax rate (i.e. 5% – 10%); this can be achieved by having a DTA (Double Taxation Agreement) in place – a convention for avoidance of double taxation, between the state of the parent company and that where the subsidiary is located.
If the parent and subsidiary companies are located in the EU member states no withholding tax is levied on such dividends from the subsidiary according to the EU parent/subsidiary directive. This rule applies where the parent company holds more than 10% of stake in its subsidiary.
On the other hand, it is vital that the holding jurisdiction, where the funds will be received as dividends, be exempted from corporate tax or reduced through tax credit method.
- The holding company provides the subsidiary company with buying power, research and development funds, marketing money and know-how, employees, technical expertise and other features which otherwise it could not afford or accomplish alone.
- The parent can provide the monetary means and capability to jump start new companies and products.
- Ability to offset profits and losses of one part of a business with another.
- Liabilities and credit claims are locked in that subsidiary and cannot be passed on to the parent company.
- Allows for joint ventures with other companies, with each one owning a portion of the new business operation.
- A major disadvantage of being a subsidiary of a large organization is the limited freedom in management.
- Decision making can become time consuming as issues often must go through various chains of command within the parent bureaucracy before any action can be taken.
- Legal paperwork involved with creating a subsidiary can be lengthy and expensive.
- Control also becomes an issue when a subsidiary is partially owned by another outside organization.
Tax reasons to set up a holding company
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A holding company usually collects the dividends (profits after tax) of the subsidiary company as free from tax as possible and does not tax pure participation profits. In addition, further distributions from the holding companies usually only have a lower tax levied on them or, in other and best case scenarios, they are full tax exempted – no tax on dividends being paid to the shareholders of the holding company or umbrella company.
In addition, holding companies can substantially reduce the taxable profit of the subsidiary companies, by invoicing the subsidiaries in respect of their activities, same also applying in the case of holding companies holding industrial property.
Privacy of Settlor
Cyprus and Netherlands, in particular, have a so-called holding privilege, which means there will be no taxation of proceeds purely from holdings.
Cyprus offers further benefits in this connection, considering it will be tax exempted at source in the event of further distributions to non-Cypriot owners, and even under non-DTA circumstances, active income is taxed at a rate of only 12.5%.
Where to register a holding company
Company set up and corporations provided limited liability protection to their owners. Typically, the owners are not responsible for the debts as well as liabilities of the business. Corporations also gains tax benefits such as deductibility of health insurance premiums paid on behalf of an owner-employee. It also helps saving on self-employment taxes. It may help a new business establish credibility with potential customers, employees, vendors as well as partners.
TBA & Associates is the best online destination for hassle-free company set up.
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Disclaimer: While TBA & Associates strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact TBA Customer Services for advice on your specific cases.