Advantages of a Holding Company
A holding company is a company that owns shares in another company. It generally does not produce goods or services itself. The sole purpose of a holding company is usually to own shares in another company. The reasons for establishing holding companies are diverse. They may be created to operate for a short period of time or as part of a long-term plan. Whether it is better to form a holding company rather than holding them personally requires significant consideration of a person’s unique circumstances and advice from qualified professionals. Factors to consider include the nature of the business, other participants in the company and your long term goals. In this article I have outlined some of the benefits associated with creating holding companies.
Minimise Exposure to Risk
As a business owner, creditor protection is an important consideration. Even in the best planned businesses, unforeseen circumstances can arise. Holding companies may protect a business owner’s interests by minimising exposure to the risks of trading. Where a dividend is received by an Irish resident company from another Irish resident company it is exempt from corporation tax. By creating a holding company, retained earnings can be transferred from the trading company by paying tax-free dividends to the holding company. Business owners can thereby confine risk to the trading company without exposing the cash reserves held in the holding company. The holding company should be exposed to risk only to the extent of its investment in the trading company. If a holding company later decides to lend money to the trading company, it can secure the debt and become a secured creditor of the holding company. This gives the trading company priority when it is time for the debt to be repaid.
Tax Efficient Reinvestment
Another important advantage of a holding company is the ability to reinvest cash reserves on a tax efficient basis. To illustrate, profits from an active business earned inside a trading company are subject to a corporate tax rate of 12.5%. These after corporate tax earnings can then be distributed to the shareholders in the form of dividends. If the dividends are received by an individual shareholder they are subject to personal income taxes. Instead, the payment of tax free dividends to a holding company can allow the holding company to reinvest the funds it receives. By filtering out one layer of tax, the reinvestment of funds becomes tax efficient. This may be especially beneficial where there are a number of unconnected shareholders of the trading company. Where each of these shareholders can have their own personal holding company, this offers them the flexibility to independently decide whether they want to pay dividends of the trading company through the holding company and out to themselves or alternatively, whether they want to leave some or all of the trading company dividends in the holding company to be reinvested for their own personal benefit.
Irish tax law provides for a capital gains tax exemption for disposals of qualifying subsidiaries by an Irish holding company. The Irish holding company must hold at least 5% of the subsidiary, which must be resident in an EU or treaty jurisdiction and pass a trading test. This contrasts with the 33% tax rate applicable to disposals by individuals.
With correct advice, holding companies may provide various tax and non-tax benefits. A thorough understanding of the potential benefits is key to making any decision as there will be many instances where a holding company may be very beneficial and some instances where they may offer minimal benefit. Individuals interested in creating a holding company should first seek assistance from a trusted advisor who can provide the information and customized advice to assist them with their particular situation.