A holding company is a business that exists to deal with the assets of other businesses, and to invest in and manage other businesses. They are private limited companies with their own shares, and they normally undertake activities that do not involve the sale of products or services.
Alphabet: a recent example
The easiest way to understand something like this is with an example. Alphabet was founded in 2015 by Larry Page and Sergey Brin, the co-founders of Google, and it is now a holding company that has complete ownership of Google and several other businesses. Alphabet itself, however, doesn’t sell or trade anything.
“What is Alphabet?” asks Larry Page, in an open letter on the site, “Alphabet is mostly a collection of companies. The largest of which, of course, is Google.” He goes on to say that “Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed.”
The purpose of holding companies
Like Alphabet, many other holding companies exist to more clearly distinguish between the management of different parts of a corporation or conglomerate.
Google and the other businesses are subsidiaries of Alphabet: businesses that are wholly owned by Alphabet, or who Alphabet own a majority of. These businesses have distinct goals and management structures.
Smaller holding companies might be established to own subsidiaries that own different aspects of a business in order to keep them separate in case of a legal dispute. For example, different subsidiaries might own the different franchises of a larger corporation. In case of one such franchise coming into financial trouble, the impact this will have on the holding company and other subsidiaries will be limited.
It is also worth mentioning that although Alphabet is a US company, it functions in a very similar way to UK holding companies. The main differences lie in tax rates and what does and doesn’t qualify for tax exemption.
Registering a holding company
In some ways, holding companies are very similar to other private limited companies, and they need to be registered with Companies House just the same.
If you are setting up a holding company, you will need the following details, including:
- A company name
- A registered address
- Details of at least one director and shareholder
- Memorandum and articles of association
- Full details of any shares already given to shareholders.
Dividends and tax exemptions
As well as existing for management purposes, many holding companies exist for tax purposes, as there are various exemptions that they can take advantage of.
One of the main exemptions is that companies with an annual turnover of less than £10,000,000 do not need to pay tax on dividends, so they can take the profits of a subsidiary as dividends tax-free.
Historically, holding companies have also been established in tax havens to take money out of a UK subsidiary and not have to worry about paying much tax. In order to combat this, the British government started the Diverted Profits Tax (DPT). The current DPT rate is a 25% tax on all profits moved overseas from UK companies.
However, SMEs remain exempt from this new tax rate. If a holding company’s UK sales are lower than £10,000,000, or their UK expenses are less than £1,000,000, they will not have to pay DPT.
Tax issues are complex for holding companies, and if you are involved in a holding company you should talk to a tax specialist about what you do and don’t need to pay.
VAT considerations
The other major tax that most holding companies don’t need to worry about is VAT. Because they don’t trade goods or services, they aren’t eligible for VAT.
That said, a holding company can become eligible for VAT if it starts providing taxable services, such as management, to its subsidiaries. In this example, VAT becomes compulsory once the company’s taxable earnings become more than £83,000.
Selling the shares
The final key exemption that holding companies can take advantage of is an exemption from corporation tax on earnings made from the sale of their shares in their subsidiaries.
Ordinarily, the money raised from the disposal of shares in a subsidiary would be eligible for corporation tax, but the substantial shareholding exemption (SSE), comes into effect when the following conditions are met:
- The holding company has held at least 10% of the subsidiaries shares for at least a year.
- Both the holding company and the subsidiary have to be trading before and after the sale of the shares.
- The subsidiary’s activities cannot include substantial non-trading activities.
As previously mentioned, in the scenario of a holding company disposing of its shares, a tax specialist should be consulted to make sure that all of the right guidelines are met.
published under Management
