Setting Up a Holding
Concept of the Holding
Company: General Perspectives
The term “holding company” does not
describe an independent legal form but a form of organisation set up in
practice in relation to the parent company of a group of companies and
is not legally defined.
The holding company organisation
consists of two levels: a corporate headquarters or parent
company and several, legally and organisationally independent
subsidiary companies, in which the holding company (from the English
“to hold”) holds a share of the capital.
The organisational form of the holding company
is defined - unlike the organisation of functional areas or the
organisastion of the business sectors - less through the internal
allocation of duties than through the allocation of the property rights
and, accordingly, through powers to make decisions and issue
The creation of goods and services is carried out within the
subsidiary companies, the basic units of the group. It is irrelevant
whether these vertical part stages operate in the same wealth-creation
process and, accordingly, a functional division exists or whether they
are active in different wealth-creation processes and there is,
accordingly, a division according to property areas. Many holding
companies try to make use of the effects of synergy between the
subsidiary companies. As a result of this intention, main areas emerge
with corresponding functional authority to issue instructions to the
subsidiary companies that are created according to regional or
product-oriented points of view.
The holding organisation is an
instrument for the exploitation of tax benefits, for circumventing
equity holding limits and for the realisation of advantages in terms of
size and specialisation within the context of the capital investment.
Furthermore, this organisational form allows the easy integration of
businesses acquired. Tax benefits can be taken advantage of by the
holding company moving its head office to a country where the tax
environment is more attractive.
The profits transferred from the subsidiary companies
to the holding company are then subject to more favourable tax
legislation. For reasons to do with antitrust law, companies are
frequently prohibited from holding fairly large equity stakes in other
companies. Moreover, in many cases, exceeding a minimum participation
involve statutory duties. In order to circumvent this, holding companies
are set up in many cases.
Non-Tax Reasons for Setting Up a Holding Company
A holding company collects the dividends (profits
after tax) of the subsidiary company/companies as free from tax as
possible and does not tax pure participation profits. In addition,
further distributions from the holding company have only a small amount
of tax levied on them or, in the best case scenario, are untaxed (no tax
at source by smuggling the dividends through to the shareholders of the
holding company or umbrella company/companies = dividend routing). In
addition, management or administrative holding companies can invoice the
subsidiary companies in respect of its activities, which will
correspondingly reduce the taxable profit of the subsidiary companies.
The same applies in the case of holding companies that hold patents,
licences or rights.
Non-tax reasons for setting up a holding company
Legal separation of the operational business from
the strategic responsibility
Concentration of management and administrative
ˇManagement and administration of the holdings within the
Concentration of financing functions
Bundling of shares and
pooling of profits in the case of joint ventures
Company within the EU
If the subsidiary or basic companies are located
within the EU, then, as a rule, a Cypriot, Dutch or Spanish holding
company is suitable due to the effect of the EU parent-subsidiary
directive (=tax-free collection of dividends, provided that the
preconditions of the parent-subsidiary directive are met, with respect
to the value of the stake and the period for which it is held), EU
freedom of establishment
and/or EU directive on mergers (tax-neutral exchange of shares, merger).
Cyprus and Holland, in particular, have a so-called holding privilege,
that is, there is no taxation of proceeds purely from holdings.
Cyprus offers further benefits in this connection: in principle,
there is no tax at source in the event of further distributions to
non-Cypriots, and even under non-DTA circumstances, active income is
taxed at a rate of only 10%.
A Swiss holding company is suitable in the case of
certain constellations. However, this can also have unfavourable
repercussions: a tax rate of 35% at source in the event of further
distribution under non-DTA circumstances, and there are only positive
effects analogous to the EU parent-subsidiary directive provided that
subsidiary companies are located within the EU AND there is a DTA with
Switzerland in existence (otherwise exemption from tax at source is only
granted after a holding period of two years).
Companies in Other Countries
Other countries such as the United Arab Emirates
(UAE), certain offshore countries or Singapore may also be suitable as
the location for a holding company. When it comes to the selection of
the right location for the holding company, the questions listed below
are important, among other things.
Right Location for the Holding Company
Thus the following factors are important, among
other things, for determining the right location for the holding
-Location of the subsidiary companies (DTA circumstances, EU, non-DTA
-Pros and cons of the individual holding company locations, with regard
to the priority aims
-How are non-holding company activities taxed in the country where the
holding company is to have its head office?
-Is there any holding privilege at all, that is, no taxation of the
dividends flowing in in the case of pure investments
-How are further distributions from the holding company directed at home
and abroad taxed (question of taxation at source)?
-How are interest and licence payments of the holding company taxed?
-What are the arrangements for the deduction of losses on disposals and
-What are the arrangements for the deduction of investment
expenses/external borrowing of the partners?
-Issue of the CFC regulations, regulations concerning additional
-Under what conditions do non-holding company activities infect the
Services of Our Legal Firm with regard to
“Setting Up a Holding Company”
-tax advice,“suitable location for a holding company”
under existing conditions or conditions to be created (location of the
subsidiary companies, country of residence of the recipients of the
dividends, main aims etc..)
-establishment of the holding company abroad,
including all the necessary services such as setting up the company,
entering it on the register, representation of the nature of the holding
company to the domestic tax authority, and the necessary physical escape
of the holding company (from a virtual office to an actual office)
-Insofar as no director has been appointed: trust
director or full-time director in the country where the holding company
is to have its head office (=5 DTA:location of the senior management of
the business as the location of the business premises)
-At the active holding company or group level:
linking the employees of the holding company, visa matters, payroll
accounting, assistance with finding living accommodation in the country
where the holding company is to have its head office, suitable offices
for the holding company etc.