What is a holding company used for?

A holding company is the parent company that does not undertake any business operation or activity by itself but holds or owns shares in other companies known as subsidiaries to manage them. It holds assets of its subsidiaries, which could be in the form of immovable objects, patents, trademarks, securities, etc. 

 

The holding company is used for 

 

 

A holding company is not involved in any business operation instead looks after the management etc. of its subsidiaries, which are separate entities. The valuable assets held by the holding company are therefore protected from creditors and other liabilities that operating companies may incur. If any of the subsidiaries take a risk and fails or goes into bankruptcy, the loss will not affect the holding company. It can simply sell its shares in the failed subsidiary. 

 

 

The assets and business of a single company having multiple businesses are exposed to greater risks than a holding company because it is liable and responsible for the borrowings, losses, and failures of the entire business. Whereas, a holding company distributes its multiple business operation and assets amongst its subsidiaries. The holding company itself holds some percentage of shares and assets in each of these subsidiaries; therefore, it only has a proportionate liability for the loss, borrowing, and failures of the subsidiary company. 

 

 

By filing a consolidated tax return a holding company may reduce its tax liability by appropriating losses of one subsidiary with the profit of other subsidiaries, which results in the overall lower tax bill for all the group companies. The dividend paid by subsidiary companies to holding companies is exempted from Corporation Tax. The shareholder can then extract the dividend when feasible. The UK laws allow the setting up of holding companies in another country with a relatively lower corporate tax rate as compared to the UK. A holding company can be exempted from VAT on taxable supplies if it is disposing of shareholdings in subsidiaries, defending it and its subsidiaries from takeover, receiving dividend payments from the shareholders, and acquisition of shares in subsidiaries. 

 

 

The management of the holding company and subsidiary companies is controlled by the directors of the holding company, which gives it a unified and centralised management structure that allows it to maximise the performance and growth of the subsidiaries. A holding company gains control of more businesses with a small capital. A holding company could obtain control of a company by acquiring 51 percent of its stocks and in certain companies; it could be even less i.e 25%. 

 

 

If the group structure of a holding company satisfies strict conditions of Group Loss relief and/ or Capital Gain Group, it has the option to distribute losses and gains between companies in the group. The losses made by a company in a group can be transferred to another group company. Even current trading losses, non-trading deficits, excess management expenses, and excess qualifying donations can also be transferred. 

 

 

The dependency for a mortgage loan does not lie on a single loan provider; each subsidiary company can approach different loan providers. The loan between connected companies does not raise any tax charge. 

 

 

The lenders consider the financial strength of a holding company better than an individual subsidiary company. They consider the shares owned by the holding company as tangible assets that can be easily transferred to them in case of and default by the holding company, therefore, offer loans at a lower rate of interest to the holding company than to an operating company. Thus, the holding company can obtain a loan and distribute the funds to the subsidiary. 

 

 

A holding company does not itself perform any business activity. It holds both tangible and intangible assets and can make its own investment decisions. Thus, it can use its property to its benefit and for the benefit of its subsidiary companies. 

 

 

The assets of a holding company protect its subsidiary companies and give them greater powers to diversify their business more efficiently, invest in new and large ventures and even exit any venture if need be. This flexibility results in the growth and development of the entire group without any to the holding company. 

 

 

Persons from the holding company are on board the board of its subsidiary company which ensures continuity of business even if a key person in any of the subsidiaries leaves it. 

 

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