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

Advantages

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.

Disadvantages

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.

Subsidiary company

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.

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