Entrepreneurs who are successful in growing a business often pay too much attention to their business plan and too little attention to their business structure.
The emphasis on short-term speed and agility in the start-up world means that the longer-term benefits provided by an effective holding structure – protecting intellectual property, streamlining royalties and dividends, facilitating secure foreign expansion, and enabling enhanced exit opportunities ¬– can easily get missed.
An entrepreneur who is considering international expansion should not overlook the importance of establishing a holding company that is based in a competitive international location before setting up an overseas subsidiary or subsidiaries.
A holding company is a separate parent company created to own a controlling interest in a subsidiary company or companies. A holding company doesn’t necessarily trade itself; its main purpose is to form a corporate group. A well-planned group holding company can provide the following advantages:
- Reduced Risk – In a group structure, the risk to the overall business is minimised if one of the operating companies performs poorly or becomes insolvent. This would not apply where everything is operated within a single company.
- Asset Protection – A holding company can hold the valuable assets of a business such as intellectual property (IP), trading or investment property, plant and machinery and excess cash. Such assets can be leased to the subsidiaries, if required, but should be protected from creditors and general trading risks.
- Asset Management– All the assets will be properly recorded and tasks relating to recording and managing filings and renewals and licensing can be dealt with more efficiently by staff with relevant expertise.
- Royalty Streaming – If IP is assigned to the HC, this enables the IP asset to grow in value with continued brand development. Where a holding company licenses its IP rights to affiliated operating companies, it will generate a stream of potential royalty income back to the holding company.
- Investment Platform – A holding company provides an efficient platform for existing and new investors to contribute loan and/or share capital to fund future expansion and growth. Assets will be recognised as separate assets on the holding company balance sheet and the licensing revenue stream will be clear to investors or lenders.
- Shared Costs – There may be administrative and central services that can be performed at the level of the holding company and charged out to its subsidiaries so that costs are appropriately shared.
- Tax Benefits – Dividends can pass between the subsidiary companies and the holding company without incurring tax. Capital gains tax exemptions are also generally available where a company owns more than 10% of the shares in another company and sells those shares. Group tax relief allows members of a group of companies to transfer certain losses to other members of the group.
- Shareholders are typically able to defer personal taxation if dividends received by the holding company are reinvested downstream at the level of subsidiaries, by making shareholder loans or by funding market expansion.
Holding companies are generally established in a jurisdiction that has an extensive network of double taxation agreements (DTAs), enabling current (and future) subsidiaries to remit dividends with reduced withholding taxes (WHT) and enabling the holding company to collect dividends from subsidiaries without immediate liability to tax. For these reasons, Sovereign often recommends the following jurisdictions as holding company locations:
With a holding company structure in place, a partial or total exit can also be achieved swiftly and efficiently. If all the underlying subsidiaries are sold by the holding company, depending on the location of the holding company there should be no capital gains tax on disposals of subsidiaries subject to meeting qualifying conditions – typically, owning at least 10% of the ordinary shares in the company for a continuous period of 12 months during the two years before disposal.
Alternatively, where the holding company itself is disposed of by non-resident owners there should be no exposure to capital gains tax in these jurisdictions, while the registered ownership of the active downstream subsidiaries will remain unchanged.
There may be reporting requirements and personal taxation considerations for the shareholders in the country where they currently reside, such that it may be beneficial for them to move their tax residence to a location where foreign dividends are subject to reduced or zero rates of taxation, such as:
- UK (relevant to non-UK domiciled persons)
- Hong Kong
- The Bahamas
In assessing and fully evaluating the case for a holding company structure, the circumstances will be unique to the particular business and its location. For further information or an initial consultation without obligation, please contact Simon Denton, Managing Director of Sovereign UK Ltd by phone on +44 (0)7887992649 or by email below.