Holding Company

 

What is a holding company?

The term “Holding Company” comes from the verb “to hold” and generally refers to companies whose range of activities can either be very broad – in which case it’s called a “Mixed Holding company” or much more limited – the term “Pure Holding Company” is then applied.

Among those authors who prefer the term “holding company” to describe a narrow range of activities, some consider that a company can be referred to as a “holding company” if its only activity is the “holding” and control over subsidiary companies.

Rambert writes on page 10 in “Les sociétés de participations (la holding) et la société anonyme”: “A holding company is created to exercise control”.

Along the same lines A-J. Simons writes on page 1 in “Holding Companies”: “A Holding Company may be defined as a company whose principal object is to acquire so many shares in other companies, as shall give it the necessary majority and power to control the operations of the latter companies, and thus to form, for practical purposes, one large, well-knit organization without affecting the other separate units of the organization”.

 

Different types of holding companies

 

Pure holding company

Still in the same category of authors, we find an American point of view expressed by Waltersdorf in the Economic Journal of December 1926, who wrote: “In a technical sense, the Holding Company is a corporation chartered under the laws of one of the States, with broad powers enabling it to acquire and hold securities, and to issue its own securities. As a rule, the primary object of the device is to acquire all or a controlling majority of the outstanding stock, a certain percentage of the bonds, and other general securities and to hold continuously as securities notes for advances made in cash to cover current operating and construction needs. The Holding Company uses these different types of securities as the asset basis for the issuance of its own securities”.

What distinguishes a “Pure Holding company” from a “Mixed Holding company” is not the legal aspect, which is generally identical within the same country, but the fiscal aspect that manifests itself in the different taxation of certain types of income, as well as in the applicable tax base.

This fiscal aspect may be linked either to the business purpose or to the company’s actual activity. It may also be linked to the type(s) of income(s) to be considered, either where the profits are realised or where the activity of the company is exercised.

 

Mixed holding company

The above mentioned “Mixed Holding Company” is a company that can exercise all of the activities of a “Pure Holding Company” but that can at the same time exercise its own activities according to the company’s business purpose.

A difference should be made between:

1. Companies that limit fiscal advantages to all or part of their revenues attributable only to their “Pure Holding Company” activity. They generally benefit from bilateral tax conventions avoiding double taxation, since their commercial activities are usually subject to common corporate income tax.

2. Companies benefitting from favourable tax legislation for all their incomes, both generated by their “Pure Holding Company” activity, as well as by their own individual commercial or service activities.

These companies, whose corporate income generated by the total amount of their activities is often entirely tax-free, are often qualified as “offshore” companies, even though this term might not be applicable to them. In order to fully appreciate this fact, it’s worth taking a look at certain states in the U.S., which offer total tax exemption for all income generated outside of the U.S. by companies domiciled in that state. The term “offshore” for some of these states is geographically inappropriate since their borders are often quite remote from the coast.

A decision made during the G-20 summit in 2009 tries to make these states – qualifying as tax havens – more open to co-operation in the field of exchanging fiscal information.