What is a holding Company

Chicken #16 · 9 Feb 2011 at 11:54

I'm trying to work out the benefits of holding companies.

My understanding is very limited but it seems someone might set up a business selling goods, they then transfer the shares in that business to a holding company which is then owned in shares by the person who set it up.

Can someone give me a nice easy explanation. Wikipedia was rubbish and google has been less than helpful (I didn't quite understand the benefits)

TwsT · 9 Feb 2011 at 12:06

tax evasion is one benifit, (off shore holding companies)

britboy4321 · 9 Feb 2011 at 12:13

Laymens terms:

A holding company is a company that completely owns another company.

However the holding company ONLY owns other companies and apart from that has little else it owns.

The purpose of this is that if something really bad happens, the holding company can go bust, all debts will be written off (as the holding company is a .ltd standing for 'limited liability') and just sell the company it holds to another holding company for £1. So its a instrument to avoid awful bad (company destroying) financial things happening to the 'held company'.

So of course you want the holding company to have as few assets as possible (like computers/staff) as these will all be seized by the administrators when it goes bust.

The theory is that when this nightmare happens, the company that was '100% owned' hardly notices a bump in the road - the holding company is the fall guy and 'how terrible holding company ltd couldn't pay the £28m debts it owns from buying 'held company ltd'. Oh well, written off, company dies - the company it held? Nothing to do with them'. Without the holding company - when a financial nightmare happens, the entire operation could die.

Nowadays the courts are starting to over rule holding companies 'cheating the system' like this -- and seize the assets from the 'held' company ANYWAY. This happened to Southampton FC after they thought they were being oh-so-clever with their holding company going bust ...

Greebo · 9 Feb 2011 at 12:27

Holding companies are also used as an exit strategy for when you want to sell your main company. It is a very tax efficient way of doing it.

boxman2000 · 9 Feb 2011 at 12:30

As well as the points raised there can be further reasons for this:

This is typically used as a way of avoiding tax and these days to work effectively the holding company would have a non-UK dom shareholder. You would then retain a portion of control by being a director at either the company or holding company level (not sure on the holding co for UK tax purposes) but in a nutshell this means that when HMRC look at the structure the ultimate owner is a non-UK dom shareholder - you would receive your 'consultants' wage or some more tax efficient way of being paid (won't go into it on here) so the structures tax position would be far better placed.

Also, depending on the jurisdiction you're in the government’s tax policies may be to look right through the 'tangled web' of the structure and look at the beneficial owner(s) direct - thus removing a large part of the need to have a holding company. The first paragraph would theoretically remove the tax liability through a non-dom.

It’d been 3 or so years since I did my tax exams so am a bit rusty and not too up-to-date with UK tax changes, I’m more into offshore structures.

Chicken #16 · 9 Feb 2011 at 12:55

britboy4321 said:
Laymens terms:

The purpose of this is that if something really bad happens, the holding company can go bust, all debts will be written off (as the holding company is a .ltd standing for 'limited liability') and just sell the company it holds to another holding company for £1.

So I have a construction business with debts of a million but looks like it could recover, my holding company declares bankruptcy and the debts are wiped and I sell my business with no debts to my other holding company for £1? Is this right? That would be quite a big advantage to a holding company.

You say the courts now overrule this....how long have they not? It sounds like a massive and obvious loophole someone left open for their own advantage.

britboy4321 · 9 Feb 2011 at 13:01

Chicken #16 said:
So I have a construction business with debts of a million but looks like it could recover, my holding company declares bankruptcy and the debts are wiped and I sell my business with no debts to my other holding company for £1? Is this right? That would be quite a big advantage to a holding company.

You say the courts now overrule this....how long have they not? It sounds like a massive and obvious loophole someone left open for their own advantage.

Yes that's right. I have stated it in simple terms (you have to be careful to avoid a few legislative landmines the government put in to try and stop it) but it certainly was possible to avoid them ...

Recently for Southampton FC the judge uniquely said 'I don't care about the holding company or what you've technically done, I'm declaring the administrators can go straight for Southampton FCs jugular because it's actually that, that is going wrong here' which has kind of set a dangerous precedent which may kill off the loophole altogether (as this now effectively acts as a test-case).

But before then it could very easily be argued in court 'holding company xyz can sell what it wants at whatever price it wants it's called the free market mate - and the company chooses to sell 'held company abc' for £1 WHATS THAT GOT TO DO WITH THIS COURT YOU DON'T DETERMINE PRICES!! The companies massive financial problems are NOTHING TO DO WITH THIS TRANSACTION'. Then 2 weeks later 'Oh dear, holding company xyz has gone bust - what a shame eh? Debts written off'!!

Another side effect I forgot to mention -- on the holding company going bankrupt all the directors of the holding company (normally 1 guy) are disqualified and can not hold a directorship again (so they can't run their own company again!)-- so you have to find some fall guys who are prepared to take a PERSONAL hit .. normally putting their salary at £250,000 a year for the 4 years the holding company is in business does the trick ..

MacRS4 · 9 Feb 2011 at 13:12

TwsT said:
tax evasion is one benifit, (off shore holding companies)

Rubbish, tax avoidance yes, evasion - no. No point at all in a holding company.

Off-shore holding companies work quite well. Consider this scenario

UK
Company A

Australia
Company B

Company A is wholly owned by Company B. Employee A is an employee of Company B *not* A.

Company A provides services to a client, and receives an income. Company B invoices Company A, Company A pays Company B.

Company B now has funds to pay employee based on local tax rates.

That's a very simplistic approach. There's other things to consider like transfer of assets - renting from another company is an operational expense cost, whereas capital purchase comes out of profit in terms of taxation.

Also, you have articles of incorporation. By having sub-companies you can have different articles of incorporation, and therefore be incorporated for different purposes.

Most large companies have a core holding company, and trade through subsidiaries.

MacRS4 · 9 Feb 2011 at 13:15

The purpose of this is that if something really bad happens, the holding company can go bust, all debts will be written off (as the holding company is a .ltd standing for 'limited liability') and just sell the company it holds to another holding company for £1. So its a instrument to avoid awful bad (company destroying) financial things happening to the 'held company'.

Quite a common misconception. When Company A goes bankrupt (for example), the wholly owned subsidiary is an ASSET of Company A and is considered as part of the bankruptcy. Often sub-companies are sold as a going concern, but it's still via the bankruptcy of the holding company if that makes sense.

Imagine this scenario:

Company A - Holding Company

Company B & C sub wholly own subsidiaries

Company A goes bust, everything falls apart.

Company B or C goes bust, no big issue other than shareholding liability. Also, a smart holding company would push debt on to the company that was going bust

Vonhelmet · 9 Feb 2011 at 13:21

Organisation, mitigation of liability, possibly tax avoidance, tax efficiency on a sale...

britboy4321 · 9 Feb 2011 at 13:25

Southampton FC holding company - their plan failed ..:

'The south coast outfit had hoped to avoid any punishment as they argued that it was their parent company Southampton Leisure Holdings plc (SLH) which had gone into administration on 2 April - not the football club.'

'It was found that: "The holding company has no income of its own; all revenue and expenditure is derived from the operation of Southampton Football Club and the associated stadium company.

"The holding company is solvent in its own right. It only becomes insolvent when account is taken of the position of Southampton football club and the other group companies." '

http://news.bbc.co.uk/sport1/hi/football/teams/s/southampton/8014811.stm

In other words - judge said 'I don't care if there's 55 companies in between Southampton and the administrators -- Southampton gets punished' ..