Setting Up a Holding Company

Concept of the Holding Company: General Perspectives

The term “holding company” does not describe an independent legal form but a form of organisation set up in practice in relation to the parent company of a group of companies and is not legally defined.

The holding company organisation consists of two levels: a corporate headquarters or parent company and several, legally and organisationally independent subsidiary companies, in which the holding company (from the English “to hold”) holds a share of the capital.

The organisational form of the holding company is defined - unlike the organisation of functional areas or the organisastion of the business sectors - less through the internal allocation of duties than through the allocation of the property rights and, accordingly, through powers to make decisions and issue instructions.

The creation of goods and services is carried out within the subsidiary companies, the basic units of the group. It is irrelevant whether these vertical part stages operate in the same wealth-creation process and, accordingly, a functional division exists or whether they are active in different wealth-creation processes and there is, accordingly, a division according to property areas. Many holding companies try to make use of the effects of synergy between the subsidiary companies. As a result of this intention, main areas emerge with corresponding functional authority to issue instructions to the subsidiary companies that are created according to regional or product-oriented points of view.

The holding organisation is an instrument for the exploitation of tax benefits, for circumventing equity holding limits and for the realisation of advantages in terms of size and specialisation within the context of the capital investment. Furthermore, this organisational form allows the easy integration of businesses acquired. Tax benefits can be taken advantage of by the holding company moving its head office to a country where the tax environment is more attractive.

The profits transferred from the subsidiary companies to the holding company are then subject to more favourable tax legislation. For reasons to do with antitrust law, companies are frequently prohibited from holding fairly large equity stakes in other companies. Moreover, in many cases, exceeding a minimum participation involve statutory duties. In order to circumvent this, holding companies are set up in many cases.

Tax and Non-Tax Reasons for Setting Up a Holding Company

A holding company collects the dividends (profits after tax) of the subsidiary company/companies as free from tax as possible and does not tax pure participation profits. In addition, further distributions from the holding company have only a small amount of tax levied on them or, in the best case scenario, are untaxed (no tax at source by smuggling the dividends through to the shareholders of the holding company or umbrella company/companies = dividend routing). In addition, management or administrative holding companies can invoice the subsidiary companies in respect of its activities, which will correspondingly reduce the taxable profit of the subsidiary companies. The same applies in the case of holding companies that hold patents, licences or rights.

Non-tax reasons for setting up a holding company may be:

·         Legal separation of the operational business from the strategic responsibility

·         Concentration of management and administrative tasks

·         Management and administration of the holdings within the family group

·         Concentration of financing functions

·         Bundling of shares and pooling of profits in the case of joint ventures 

Holding Company within the EU

If the subsidiary or basic companies are located within the EU, then, as a rule, a Cypriot, Dutch or Spanish holding company is suitable due to the effect of the EU parent-subsidiary directive (=tax-free collection of dividends, provided that the preconditions of the parent-subsidiary directive are met, with respect to the value of the stake and the period for which it is held), EU freedom of establishment  and/or EU directive on mergers (tax-neutral exchange of shares, merger). Cyprus and Holland, in particular, have a so-called holding privilege, that is, there is no taxation of proceeds purely from holdings.  Cyprus offers further benefits in this connection: in principle, there is no tax at source in the event of further distributions to non-Cypriots, and even under non-DTA circumstances, active income is taxed at a rate of only 10%.

Swiss Holding Company

A Swiss holding company is suitable in the case of certain constellations. However, this can also have unfavourable repercussions: a tax rate of 35% at source in the event of further distribution under non-DTA circumstances, and there are only positive effects analogous to the EU parent-subsidiary directive provided that subsidiary companies are located within the EU AND there is a DTA with Switzerland in existence (otherwise exemption from tax at source is only granted after a holding period of two years).

Holding Companies in Other Countries

Other countries such as the United Arab Emirates (UAE), certain offshore countries or Singapore may also be suitable as the location for a holding company. When it comes to the selection of the right location for the holding company, the questions listed below are important, among other things.

Finding the Right Location for the Holding Company 

Thus the following factors are important, among other things, for determining the right location for the holding company:

-Location of the subsidiary companies (DTA circumstances, EU, non-DTA circumstances)?

-Pros and cons of the individual holding company locations, with regard to the priority aims

-How are non-holding company activities taxed in the country where the holding company is to have its head office?

-Is there any holding privilege at all, that is, no taxation of the dividends flowing in in the case of pure investments

-How are further distributions from the holding company directed at home and abroad taxed (question of taxation at source)?

-How are interest and licence payments of the holding company taxed?

-What are the arrangements for the deduction of losses on disposals and partial write-downs?

-What are the arrangements for the deduction of investment expenses/external borrowing of the partners?

-Issue of the CFC regulations, regulations concerning additional taxation

-Under what conditions do non-holding company activities infect the holding privilege?

Services of Our Legal Firm with regard to  “Setting Up a Holding Company”

-tax advice,“suitable location for a holding company” under existing conditions or conditions to be created (location of the subsidiary companies, country of residence of the recipients of the dividends, main aims etc..)

-establishment of the holding company abroad, including all the necessary services such as setting up the company, entering it on the register, representation of the nature of the holding company to the domestic tax authority, and the necessary physical escape of the holding company (from a virtual office to an actual office)

-Insofar as no director has been appointed: trust director or full-time director in the country where the holding company is to have its head office (=5 DTA:location of the senior management of the business as the location of the business premises)

-At the active holding company or group level: linking the employees of the holding company, visa matters, payroll accounting, assistance with finding living accommodation in the country where the holding company is to have its head office, suitable offices for the holding company etc.