What is a Holding Company? Let’s find out what the characteristics of this company form are, advantages and disadvantages, where to incorporate and how to start the incorporation process.
A holding company is a type of corporate organisation that controls one or more other companies, holding a stake in them. Its main purpose is to manage and coordinate the activities of its subsidiaries in order to maximise the value of its investments.
The holding company may act as a kind of command centre, making strategic decisions for the subsidiaries, offering administrative and management support and providing capital for investments. In addition, it may also provide common services such as human resources management, accounting and finance.
In many cases, subsidiaries operate in different sectors, allowing the holding company to diversify its investment portfolio. The holding company structure is often used by companies to achieve greater tax efficiency and to simplify the management of a wide range of business activities.
A holding company may hold different types of assets, depending on its investment objectives and business strategy.
In general, a holding company may hold shares in other companies, including listed and unlisted companies, as well as bonds, mutual funds, real estate, trademarks and patents. In addition, a holding company may also hold financial assets such as bank accounts, investments in securities, mortgages and other debt instruments.
Assuming that the main objective of a holding company is to increase the value of the investments of its subsidiaries through strategic management of the assets held, the investment decisions of a holding company depend on its long-term strategies.
There are various business strategies that a holding company can adopt, depending on its objectives and market conditions. Below are some of the most common strategies:
The performance targets of a holding company depend on its resources, competencies and market expectations. The choice of appropriate performance targets is critical for long-term success.
A holding company that invests in several companies and sectors reduces the overall risk of the portfolio, as the gains and losses of one company do not directly influence the value of the other holdings.
| Advantages | Disadvantages |
| Diversification can help mitigate the holding company’s overall risk, allowing it to take advantage of promising investment opportunities in different sectors. |
Diversification may also reduce the focus and attention on a single activity, making portfolio management more difficult and complex. In addition, the divisional structure of a holding company may foster competition between subsidiaries for company-wide resources and make it difficult to maintain a consistent corporate image. |
It can manage its subsidiaries centrally, reducing management costs and improving efficiency.
| Advantages | Disadvantages |
| Centralisation can help reduce management costs and improve portfolio efficiency. | Centralisation can also limit the autonomy of subsidiaries and slow down their ability to adapt to market needs. |
It can consolidate the financial, human and technological resources of its subsidiaries, creating synergies and improving their competitiveness.
| Advantages | Disadvantages |
| Consolidation of resources can create synergies between subsidiaries, improve overall competitiveness and increase market share. The sharing of resources and expertise can also lead to the reduction of operating costs and the creation of new business opportunities. | Consolidation may also limit the flexibility of subsidiaries and make innovation strategies more difficult. |
You can protect your capital through conservative and safe investments.
| Advantages | Disadvantages |
| Conservative investments can protect the holding company’s capital and reduce the risk of loss. | Conservative investments can also reduce earning potential and limit long-term growth. |
The structure of a holding company makes it possible to separate the ownership of the control of the company, thus limiting the liability of the individual owners.
| Advantages | Disadvantages |
| Reducing the personal risk of shareholders. | The managers of the holding company may not have the same level of commitment and motivation as the shareholders of the subsidiary. |
A holding company can take advantage of tax efficiencies, e.g. by deducting costs of subsidiaries, by reducing taxes through the use of subsidiaries in low-tax countries or through tax exemption on capital gains from the sale of corporate participations.
| Advantages | Disadvantages |
| Greater fiscal efficiency | Diversification may also reduce earning potential, as subsidiaries may not achieve expected returns. |
A holding company provides easier access to capital due to several factors that influence negotiations with lenders and banks. In addition to the greater reputational weight, the diversification typical of this type of corporate structure, the tax structure and consolidated financial reporting ensure greater attractiveness, and generally allow more favourable interest rates on loans to be negotiated.
| Advantages | Disadvantages |
| They can be valued more favourably by the financial markets than individual companies due to their greater scale and diversification. | Smaller holding companies may have difficulties in accessing credit. In addition, specific regulations may limit the ability to obtain financing |
A holding company and a standard company have some fundamental differences in terms of advantages and disadvantages, as shown in the table below:
| Limited Liability Company | Holding company | |
| Corporate structure | Independent business structure in which one or more natural or legal persons own and operate the business. | Companies holding shares in other companies. |
| Purposes | The purpose of a limited liability company is to manage and develop its business, with the aim of generating profits for its owners or shareholders. | Their main purpose is to hold participations in other companies. In this way, holding companies can obtain income from participation in other companies or from the sale of their participations. |
| Taxation | Subject to direct taxation such as income tax or VAT, depending on the jurisdiction in which they operate. | They can benefit from favourable tax regimes by operating in favourable jurisdictions as well as take advantage of special tax strategies (see next section). |
| Access to capital | Reduced access to capital, based on the reputational profile of the individual company. | It can provide easier access to capital for its subsidiaries by leveraging its reputation, financial strength and existing relationships with lenders or investors. |
In general, while both offer limited liability to owners and shareholders, protecting them from possible corporate losses, holding companies differ significantly from limited liability companies in their corporate structure, purpose and taxation.
Holding companies offer the opportunity to achieve a particularly efficient tax structure, if tax planning is carried out thoroughly. This is why when an entrepreneur decides to set up such a structure, he or she relies on specialised companies such as GR Morgan Formation to incorporate the company.
There are several strategies that can be adopted to optimise the taxation of a holding company. The following are some of them, which are of a generic nature. It should be borne in mind that each jurisdiction has its own peculiarities and that specific tax planning should be done and tailor-made according to the companies involved and the specific needs of the client.
It is possible to deduct losses incurred by a holding in a subsidiary from the taxes owed by the other holdings or the holding company itself. This can lead to significant tax savings, as the losses can be offset against profits from the other participations.
Holding companies may obtain income from participation in other companies in the form of dividends. In many countries, dividends received from investee companies are exempt from taxation or enjoy a lower tax rate than corporate profits. In this way, the company can earn income at a lower tax rate than on its core business.
Furthermore, holding companies can also offer efficient tax planning for owners or shareholders. For example, through the distribution of dividends or the sale of participations, the owners or shareholders of the holding company can obtain income at a lower tax rate than that applied on the profits of its core business.
Double taxation of participation profits can be reduced. In many countries, dividends received from participations are exempt from taxation or enjoy a lower tax rate than corporate profits. This means that the holding company can avoid double taxation on profits from participations and its main activities.
Holding companies may enjoy tax advantages depending on the jurisdictions in which they operate. For example, some jurisdictions offer tax advantages for companies that hold interests in other companies, such as tax exemption on dividends received.
Since holding companies do not participate directly in operational activities, the range of possibilities in the choice of the state in which the holding company’s seat is to be established is wide and it is essential to carefully consider the most suitable jurisdiction for incorporation. Indeed, this choice has important tax, legal and operational implications.
But how to choose the most suitable jurisdiction for the holding company?
Well, the most relevant factors in the choice of jurisdiction are the following:
One of the main considerations when choosing a jurisdiction for the opening of a holding company is the tax system. The latter can have a significant impact on the activities and profits of the holding company, affecting the return on investment and the distribution of dividends.
Some jurisdictions offer a particularly favourable corporate tax regime, such as low taxation or tax incentives for holding companies.
Furthermore, it is important to assess bilateral international tax treaties between the holding company’s jurisdiction and other jurisdictions where it may have subsidiaries or holdings, in order to avoid double taxation and optimise the overall tax structure.
Finally, the tax regime should be stable and predictable, with clear and consistent tax rules over time. In this way, the holding company can plan its activities and investment strategies effectively and predictably.
The assessment of the legal and regulatory environment is crucial in choosing the jurisdiction in which the company will operate. Laws and regulations affect the formation, structure and management of the holding company, as well as its tax compliance and business opportunities.
For example, some jurisdictions may have stricter laws on corporate governance, financial transparency and directors’ liability, while others may have more flexible and less restrictive regulations. In addition, some jurisdictions may have specific requirements for the formation and operation of holding companies, such as the presence of a local director.
In addition, the chosen jurisdiction should provide a stable and predictable regulatory environment that ensures investment security and reduces the risk of legal uncertainty. In this way, the holding company can avoid possible legal or tax problems and concentrate on achieving its business objectives.
As we can observe in the current tumultuous international political situation, political instability can lead to unpredictable changes in legislation and regulations, creating uncertainty and risk for the holding company’s activities. Furthermore, economic instability can lead to unpredictable market and currency fluctuations, making it difficult for the holding company to plan its activities and investments.
On the other hand, jurisdictions that offer a stable and predictable political and economic environment can provide a wide range of advantages for the holding company, such as a favourable investment environment, a reliable legal system and increased investment security.
Incorporation costs play a significantly less important role when it comes to the formation of a holding company than when it comes to the incorporation of a limited liability company. Nevertheless, it is still worthwhile to assess the costs, which can vary considerably. A holding company in the United Kingdom can be formed for as little as €150, while a similar company in Ras al Khaimah, United Arab Emirates can cost over €1650.
The reputation of a country is an important factor to consider. A country’s reputation can influence investor and customer confidence, the availability of banking and financial services, and the public perception of the company. A jurisdiction with a good reputation may offer a stable and business-friendly environment, while a jurisdiction with a negative reputation may be less attractive to investors and have negative effects on the company’s credibility.
The inclusion of an offshore jurisdiction on the European Union tax haven blacklist can be a deterrent to investors and, if the holding company has not been set up with care by experts in the field, can have negative consequences for the company. A blacklisted jurisdiction may be subject to international sanctions, banking and financial restrictions, and other forms of international pressure. This can make it difficult for the holding company to conduct international business and obtain financing from international financial institutions.
Currently on the EU list of non-cooperative tax jurisdictions are the following states:
Should the holding company operate in a hybrid mode, i.e. if it not only controls one or more other companies, but also plays a productive role, other factors, typical for companies, such as the quality of infrastructure, labour costs and the availability of labour on the market, will have to be assessed.
The term ‘group’ is often confused with holding company. In reality, a group is understood as a plurality of legally autonomous companies that function as a single economic entity. When this group is controlled and/or coordinated by a single economic entity, the latter is represented by the holding company, a company whose corporate purpose includes the acquisition of shareholdings.
While the horizontal group is characterised by relations made by contractual agreements in an environment of mutual equality (), in vertical groups the parent company, the holding company, is financially linked to the subsidiary companies through the participation of the former in the capital of the latter. Where there are characteristics of one and the other, one is faced with mixed groups.
Joint ventures fall into a separate category, as they can be either horizontal, i.e. equal (contractual joint venture), or vertical, i.e. majority-owned (joint venture with corporate form or incorporated joint venture). In the latter case, the partners set up a third company that acts as a holding company, the purpose of which is to manage the processes that relieve the individual companies of financial responsibility.
A company that does not participate in any activities of the subsidiaries, but only has the function of coordination and management.
In addition to operating subsidiaries, it also manages its own industrial or commercial activities.
There are different types of holding companies that fall into the first or second category, and may fall into both. Sectoral holding companies, in which subsidiaries operate in complementary sectors, subholdings, subject to the management of another holding company, and family holding companies (particularly common in Italy).
A holding company can be incorporated by taking advantage of the different solutions offered by the various governments’ tax systems. It can be incorporated either as a corporation, as a limited liability company, as a partnership or as a trust. The choice of company type will depend on factors such as tax and liability implications, the regulatory requirements of the jurisdiction, but also on the choice of corporate structure.
Some commonly used types of incorporation for holding companies are corporations, limited liability companies (LLCs), partnerships and trusts. Each of these types of incorporation has advantages and disadvantages, and the choice of the type of incorporation will depend on the specific needs and objectives of the holding company.
The most commonly used types of companies for setting up a holding company are:
The development of a business plan is essential to define the objectives of the new company structure and the group, organisational and financial strategies to be adopted. In addition, it is crucial for accessing financing, offering a prospect and a complete view of the company to possible investors and partners.
In general, a well-structured business plan includes the following aspects
The new holding company will have to actively manage and support its subsidiaries through specific corporate strategies also called parenting strategies. These strategies are intended to lead to performance improvements in the aggregate business by generating an advantage (Parenting Advantage), which should help the daughter companies to grow, leveraging processes of organisational optimisation, acquisition, investment.
Parenting strategies can be categorised into four types, with an increasing degree of autonomy offered by the holding company vis-à-vis its subsidiaries.
Regardless of the strategy adopted, the primary objective of the holding company must be to achieve a parenting advantage that provides a growth environment for the subsidiaries.
Once we have defined the structure of the holding company, selected the jurisdiction where we will incorporate the company, assessed the type of incorporation and defined the corporate strategies, we will start the process of incorporating the company.
The first step in registering a holding company is to identify the governance and composition of the board of directors. The latter will be responsible for the overall direction of the holding company as well as management processes.
The most difficult part is the production of the necessary documents to be attached to the company’s application for registration.
Since each jurisdiction has different document requirements, we list below the most common documents generally required:
Once the company is incorporated, it is necessary to approach a banking institution to apply for the opening of a bank account. We at GR Morgan Formation have experience in multiple jurisdictions and offer the service of opening bank accounts in both UK and offshore jurisdictions.
In terms of documents, a certificate of incorporation, business licence and tax code are generally required.
When it comes to setting up a holding company, you can rely on a team of experts to provide you with tailor-made advice and solutions.
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