Invariably, when you’re starting a new company, it’s for the purpose of trading (buying and/or selling goods). However, some companies, that on the surface seem like a conventional trading entity, are quite the opposite — they simply own assets without trading. And there’s your “holding company”.
What Does a Holding Company Do?
Generally, a holding company is a company that deals specifically with assets, investments, and management, rather than directly buying or selling goods and services to muster profit from the sales of products. Essentially, a holding company does not have any trading operations or activities.
A holding company typically has the responsibility to supervise and manage other companies, in addition to, or instead of, holding shares and receiving dividends from their shareholdings. Other than this business practice, a holding company will not exercise any other form of business activity.
What Assets Does a Holding Company Own?
Since a holding company’s main function is to own assets and not buy or sell goods, they typically own a number of entities; invariably anything with a value can be owned by a holding company as an asset. For example:
- Shares of stock in other corporations
- Limited liability companies
- Limited partnerships
- Private equity funds
- Hedge funds
- Public stocks
- Real estate
- Song rights
- Brand names
- Copyrights etc.
A company which becomes an asset of a holding company is known as a “subsidiary”. In the UK, holding companies that own more than half (50%) of another company’s shares are called “parent” companies of these subsidiaries.
How Does a Company Qualify as a Holding Company?
According to the Companies Act 2006 (sec. 1159) a company will be considered to be a subsidiary of a holding company if the following are true:
- The parent company has more than 50% of the voting rights in the subsidiary
- The parent company is a member of the subsidiary and:
- Has a right to appoint/remove a majority of its board of directors.
- In agreement with other shareholders, it solely controls a majority of the voting rights in the subsidiary.
What Are the Tax Advantages of a Holding Company?
Since many share disposals and dividends enjoy tax exemptions, a key attraction to a holding company is its potential tax savings.
A holding company can dispose of its shares without the consequence of tax liability if it owns a “significant shareholding” of at least 10% of the ordinary shares in a subsidiary for a period of 12 consecutive months during a two-year period preceding the disposal. The requisite being that both the holding company and its subsidiary are active companies for a 12-month period pre and post disposal.
Additionally, a holding company can enjoy tax exemptions for VAT-taxable supplies if a holding company:
- Acquires shares in subsidiaries
- Receives dividend payments from shareholdings
- Protects itself and its subsidiaries from external acquisition
- Disposes of shareholdings in subsidiaries
The above is not considered to be “taxable supplies” by HMRC, therefore exempt from VAT; moreover, these forms of holding companies cannot voluntarily register for VAT.
Note: If a holding company has intentions to provide taxable supplies to a subsidiary such as management/supervision services, then the holding company in question can voluntarily register for VAT. If a holding company’s annual taxable income exceeds £85,000 (accurate for the year 2019), then it must register for compulsory VAT. Indeed, there are evident pros and cons of being VAT registered and this requires further reading.
How to Register a Holding Company
Just as you would set up a private company or a company limited by shares, a holding company must go through the same set up process. You have to legally incorporate your business at Companies House and submit statutory filing requirements in a timely manner.
Some of the details you might need to hand when it comes to registering your company, include:
- The name of your company.
- Registered office address.
- Standard Industrial Classification codes (SIC).
- A minimum of one director’s details.
- A minimum of one shareholder’s details.
- Memorandum and articles of association (click here for information on how to get a copy of memorandum and articles of association).
- Share capital (share information issued to shareholders).
- Details of people with significant control.
- Documentation to support the use of sensitive words in the company name.
What Can I Use as a Company Name?
When it comes to forming a conventional limited or private company name, you would typically run a check with Companies House for its availability, without any other limitations. However, for a holding company, the word “holding” (or “holdings”) was deemed “sensitive” not not permissible. Fortunately, after some reassessment, the words “holding” and “holdings” are no longer considered to be sensitive and may be used in your company name.
An Example of a Holding Company
One of the most renowned blue-chip companies in the world, that you may not have considered to be a holding company, is Johnson & Johnson.
The company itself doesn’t actually trade like a conventional business; instead, as a result of a rather complex history, Johnson & Johnson holds ownership stakes in over 250 separate businesses. The ownership is not too dissimilar from the way you might own shares of different businesses through a brokerage account. Johnson & Johnson’s businesses are categorised under three major headings:
- Consumer healthcare
- Medical devices
However, each of the subsidiaries are individual companies with their own business practices, e.g. their own offices, bank accounts, and manufacturing facilities all over the world.
At the top of the hierarchy, Johnson & Johnson’s stockholders elect a board of directors to protect their interests. That board is responsible for decisions such as dividend policy and hiring the CEO. The CEO, in turn, hires their direct subordinates. This collective has the power to determine the CEOs and key executives at the subsidiary companies under the control of Johnson & Johnson. The parent holding company supports the subsidiaries by reducing the capital cost due the strength of its position.
A holding company will only own assets and not sell or purchase goods. If you are a business owner with a product idea who is looking to trade and scale your business, then you’ll need to form a limited company, private company, or a partnership etc.
If you do have a holding company or you’re seeking to own a number of assets and form a holding company instead of a conventional business, then it’s important to take note of all the relevant tax implications.
To find out more about a holding company and how you can register your own, contact our reputable company formations team for expert advice and help every step of the way.