Why do companies set up holding companies?

Advantages of a Holding Company

Setting up a holding company has many advantages, such as:

1. Minimising risk: The best way to set up a holding company is to structure it in a way that minimises the risk of its subsidiary companies and can disperse its assets through its subsidiary companies and therefore protects the subsidiaries from the risk of bankruptcy.

   For example, if one of the subsidiary companies goes bankrupt, the creditors can receive their due remuneration only from that subsidiary company and not from its holding company. To save itself from major risk, a multinational company should structure itself in a way that one subsidiary owns its brand name and trademarks, another subsidiary owns its real estate, and another subsidiary owns its equipment and so on. So that in the case that one of the subsidiaries goes bankrupt for whatever reason, the business keeps on going. Also, this structure limits tax liability.

2. Hold property and use it: A holding company does not produce goods and services but can hold assets both tangible and intangible such as intellectual property, land, buildings, trading stock etc. Also, it can make its individual investment decisions and can use its property to its benefit and for the benefit of its subsidiary companies.

3. Control over its subsidiary companies: A holding company, by its definition, has control over its subsidiary company which means that it has a say in the management of its subsidiary company and, if required, can hire or fire its managers and directors.

4. Protection of the property: It’s highly recommended to place your assets, such as intellectual property etc., into a holding company to ensure the longevity of your business. Also, doing so ensures that in the case of liquidation, it will provide protection to your assets and property.

5. Flexibility to engage in risky investment opportunity to the advantages of its shareholders: One of the main features of the holding company is to protect its subsidiary companies and can give you the opportunity to try out riskier investment opportunities while protecting that risk from other parts of the company. This can give you more flexibility for the growth and development of the overall company.

6. Tax planning: UK law allows you to set up a holding company in another country with a relatively lower corporate tax rate as compared to the UK; also, it has lower tax rates as compared to a trust.

   A holding company can be exempt from VAT taxable supplies if its functions are as below:

   • Disposing of shareholdings in subsidiaries;
   • Defending itself and its subsidiaries from takeovers;
   • Receiving dividend payments from the shareholdings;
   • The acquisition of shares in subsidiaries.

   Since HMRC does not observe listed functions as taxable supplies, any holding company with these functions are not liable for VAT. Apart from VAT exemption, holding companies can also enjoy tax exemption on their dividends if their annual turnover is less than £10,000,000.

   Also, a holding company can take the benefit of corporate tax exemption on its earnings from the sale of shares in its subsidiaries. However, to enjoy the substantial shareholding exemption, certain conditions need to be met:

   • The subsidiary company cannot indulge in substantial non-trading activities;
   • both the trading and the subsidiary company must be involved in trading both before and after the sale of the share;
   • the holding company must own the share of its subsidiary company for at least a year before selling it off.

7. Succession Planning: One of the main advantages of setting up a holding company is that it ensures the continuation of the business, even if it comes at the loss of its key people.

8. Directors of each company act in the best interest of their business: The holding company and its subsidiaries are separate legal entities with their own set of directors, having their own defined set of responsibilities. This means that each Board of Directors acts in the best interest of their company. So the Board have the autonomy to make decisions, and they cannot make decisions or act in the interests of a third party company.

9. Thinking ahead about selling the business: Setting up a holding company can be good for a future sale. Planning ahead shows your foresight as you may not want to sell your entire company but may sell its parts or subsidiaries strategically and at different times. It can be advisable to sell the shares of a limited company rather than selling its assets.