A holding company is usually set up for one or several of the following reasons:
1) Ensuring unity and control as well as organisation of an international group of companies
A holding company can ensure the unity and control of subsidiaries established in different countries.
It allows group consolidation and management of turnover in order to benefit from the dividends of successful subsidiaries to develop or support subsidiaries in need.
Within this framework, a holding company can set up a pooling system for the capital of different subsidiaries.
A holding company can also be created by the founder of a group in order for the holding company to maintain the majority of voting shares allowing the company’s continuity in the face of certain heirs eager to benefit from the death of the founder. In this sense, it acts as a stabilising power and the guarantor of security for a family group that faces a transfer of ownership due to death of founder.
A holding company can also help maintain the control over group in the founder’s hands during development operations.
2) Creating a financial leverage to promote and enhance the transfer of businesses
Funding of a new company or a company going through a restructuring process may be difficult.
Setting up a holding company that seeks a global credit line allows it to finance, according to the needs of its subsidiaries, those most in need, who wouldn’t otherwise easily secure a credit, especially at this time.
On the other hand, a businessman may decide to offer limited ownership of securities of one or more of its subsidiaries to their children, provided they bring this asset to the holding company. During the lifetime of the businessman, he has, through the right of ownership that he has retained, the voting right and therefore the power. After his death, the right of ownership disappears in favour of the holding company whose shareholders are the person’s children.
From that day, the children, via the holding company, own all the rights linked to the shares held by the holding company. Fiscally, depending on the country of residence of the persons concerned, this is often an excellent tax optimisation opportunity.
3) Balancing the internal or external growth policies or the distribution
The expectations of shareholders can differ greatly. Some expect the dividends, others, on the contrary, want to invest the received revenues into new developments or the improvements of funds.
To satisfy the latter aspiration, those shareholders seeking to invest, set up a holding company.
In this case, the original company sets up a distribution policy that meets the expectations of shareholders waiting for dividends, while the dividends paid to the other group are transferred to their holding company. As this holding company begins to operate, they can invest in the original company through the increase of capital that will strengthen their power in the original company.
Similarly, in view of an initial public offering (IPO), new shareholders are often eager to receive the dividends in addition to looking for capital gain. In this case also, the original shareholders, anxious not to interfere with the company’s financial performance, can create a holding company in order to collect the dividends that will be reinvested in the subsidiary.
The creation of a holding company is, as we see, the way to reconcile different expectations in terms of distribution and financial performance of a company.
4) Optimising tax
Enterprises, as well as individuals, find holding companies useful because of the tax advantages they can receive, not only linked to the activities of pure holding companies but also linked to the activities of mixed holding companies.
Certain holding companies offer very low or none at all on trading operations performed outside their territory. These companies are used for trading operations or triangulation. Many groups and individuals use them and they are sometimes used by the same states that are their biggest critics.
John Maynard Keynes said: “The avoidance of taxes is the only intellectual pursuit that carries any reward”. With such a backer, we wouldn’t dare criticise those who seek to reduce their taxes by legal means.
The question is different when the mechanism used aims to hide the taxable income from tax authorities in one’s country of residence. Ever since anti-money laundering legislation’s been introduced, first applied to the field of drug trafficking and later extended to almost all other crimes, the crime of money laundering, that invariably accompanies tax evasion, makes this activity ever more dangerous.
The exchange of information between tax authorities which tends to increase, driven by the urgent needs of states to recover a maximum tax does not facilitate this type of behaviour.
Fortunately, there are still, with the help of sober-minded legal and tax advisors, many legal ways to optimise one’s taxati