Probably, many people have heard the word holding. Also, a large number of individuals have faced the concept of media holding. Unfortunately, only a few people have an understanding of what is holding company. Therefore, in this article, we will try to explain the concept of holding company in a clear and approachable manner.
Holding company is a joint-stock company that owns a majority shareholding in legally independent enterprises to control them. Companies that are part of the holding make commercial deals on their own behalf. However, the right to resolve the main issues related to their activities belongs to the holding company.
Meaning of a holding company
So, what is the meaning of holding? Holding is a system of commercial organizations, which has a management company and a network of enterprises controlled by it. The management company is also called a parental company because it owns a controlling stake (or shares in the charter fund) of other companies. The size of majority ownership in each country is different (usually from 20% and above). Owning a controlling interest gives the right to lead and control the activities of the subordinate structure.
The parent company in the holding:
- Develops a common development concept for the holding.
- Forms a single strategy of investment and financial activity.
- Manages subsidiaries.
- Serves the functions of marketing finished products and purchasing raw materials.
- Engaged in foreign economic activity.
- Pursue internal lending and financing within the holding association.
Speaking about what is holding, it is necessary to admit that the parent company controls its subsidiaries both through dominant participation in their share capital and by defining their business activities (e.g. acting as their sole executive body) and in other legal ways.
Tax liabilities of a holding company
Many EU members offer holding companies as one of the perspective solutions for business development. What is the purpose of a holding company? A holding company may be established up to own shares in subsidiaries in highly tax-based prestigious jurisdictions. In most of these countries, there is a requirement to pay a tax on the passive income of the non-residents. In this case, it is necessary to pay attention to the concluded agreements on the avoidance of double taxation between the countries where the parental company and subsidiaries are registered. This can ease the tax burden when paying passive income (dividends, interest, and royalties).
If you invest in foreign real estate, especially an expensive one, using a holding company that owns the right to this property, you will avoid many difficulties and costs. The possible sale of the property is also simpler and faster because shares are sold to the buyer. You save on a lawyer’s fee, currency transfer abroad, and VAT, which is mandatory in some countries. Also, no capital gains tax or inheritance tax.
Benefits of the holding company
After the questions what does holding company mean and its purpose are answered, it’s time to explain all advantages of holding for business. The benefits of creating such an entity are:
- Optimizing the tax load.
- Control of businesses. However, this does not deprive subsidiaries of legal independence.
- The concentration of capital, freer flow of capital, and optimization of the investment process on this basis.
- Common technical, economic, human resource policies.
- Acquiring new market segments, expanding the range of products, using additional production capacity as a result of the takeover of enterprises.
- Cooperation of related enterprises (e.g. related to the technology chain).
The opening of a holding company in Cyprus is a reasonable step for large investors.Atrium Business Solutions
The island has a well-developed business services sector allowing running a business with subsidiaries and partners anywhere in the world. But the main advantage of the island country is, naturally, fiscal system.
Cyprus has established one of the most loyal tax policies in Europe, allowing to significantly minimizing costs. Even being the EU member, the jurisdiction offers the lowest corporate tax rate in Europe at 12.5% accompanied by numerous beneficial features for wealthy foreign investors.
The country has a zero tax on the profit on sales of securities, which is enough rare for Europe. Securities include bonds, options, binary options, futures, stocks, and collective investment schemes. According to Cypriot law, foreign currency and bills are not securities, so they are subject to taxation. Moreover, the government has signed a number of double taxation treaties with most developed countries, providing international companies with the opportunity to pay all corresponding taxes-and-duties in only one country.