The UK continues to be an attractive place to locate an international holding company as it not only offers a relatively stable legal, political and economic system, but also has a stimulating tax regime in its own right and an extensive network of tax treaties with the rest of the world.
Setting up a holding company across the Channel is an excellent solution as it allows you to operate in a safe and well-regulated environment that also benefits from minimal taxes on income streams.
A holding company is a separate parent corporate entity created to own a controlling interest in one or more subsidiary companies. A holding company owns more than half of the stock of other companies and controls the configuration of the board of directors.
The main objective is to form a corporate group and control the operating companies to their advantage. In addition to shares, holding companies may own rights to assets, real estate, trademarks, patents and represent a solid business model. They do not involve the sale of products or services.
A holding company functions through management oversight over its subsidiaries. Each subsidiary has its own independent administration over day-to-day operations.
A holding company can elect and remove corporate directors or managers and can make important policy decisions such as considering merging or dissolving. The management that runs the holding company does not take part in the day-to-day decision making of the operating companies.
One of the main advantages of operating a holding company is the possible tax savings that result. Most share sales and dividend payments are tax-free. A holding company will also be exempt from VAT-taxable services if its functions include the following:
There are several reasons why having a holding company in a group structure is more advantageous than having an independent company.
|One of the main advantages is the management of risk split between the separate companies under the common control of a holding company
|A holding company can be used to hold a company’s valuable assets such as buying and selling or real estate investments
|Dividends can be transferred between subsidiaries and the holding company without incurring tax liabilities
|If there are accounts payable within a holding company, the holding company charges them to the subsidiaries so that the costs are shared among them
A key point from which holding companies can take advantage is an exemption from corporate tax, on profits realized from the sale of their shares in their subsidiaries.
Normally, money raised from the sale of shares in a subsidiary would be adjusted for corporate tax, but the substantial shareholding exemption (SSE) takes effect when the following conditions are met:
UK Legislation practices tax exemptions for those wishing to place a holding company in the UK. One of the main exemptions is that companies with an annual turnover of less than £10,000,000 do not have to pay tax, so they can take a subsidiary’s profits as tax-free dividends. These very attractive benefits are:
Below we highlight the most interesting reasons why holding companies are primarily used:
Separate entities provide a shield of liability in that the debts of each subsidiary belong to it. A creditor of the subsidiary cannot claim from the business of the holding company or another subsidiary.
A holding company does not have to own all of the subsidiary’s stock or interests. This allows it to gain control of another company and its assets at a lower cost than acquiring all of the subsidiary’s interests.
A holding company with high financial faculty can also access lower interest rate loans than its operating companies, especially when the capital is for a startup or other credit-rated venture. The holding company can take advantage of the loan and distribute the funds to the subsidiary.
It can own assets in a variety of independent businesses. It doesn’t matter if the owners and managers of the holding company are not familiar with those businesses, because each subsidiary has its own management to run the day-to-day operations.
The standard VAT rate in the UK is 20%. Reduced rates of 5% are available for specific categories.
A holding company may become liable for VAT if it starts providing services such as the management of its subsidiaries. In this eventuality, VAT tax is mandatory if the company’s taxable income exceeds £ 83,000.
To acquire a VAT number on its own, the holding company, whose registration will be in the name of the representative member, must make or plan to make taxable supplies. A holding company may join a VAT number with its subsidiaries provided that at least one member of the group makes taxable supplies.
A UK resident holding company is subject to tax on its worldwide profits and earnings. It pays its own taxes on the income it receives while subsidiaries pay their own taxes. The main rate of UK corporation tax is currently 19% for the 2021/22 biennium.