What are Holding Companies?

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What are Holding Companies?

Holding companies can be defined as entities that hold assets of other companies. Holding companies can have shares of onshore and offshore companies, operate worldwide and they are very sophisticated legal tax savings vehicles.

The purpose of Holding companies is to be able to control the shares of other companies to give loans, exploit commercial activities such as the brand or customers, collect dividends, loans, royalties and exploitation rights. Holding companies can transfer shares from one company to another and from one country to another through a purchase/sale made by holding company in an offshore financial center. The purchase/sale and the change of owners can be done without paying taxes in the country where the company is operating. The usual procedure of a holding company is to buy and sell companies from a third country and this is where tax havens come into play being ideal jurisdictions to channel investments in third countries without paying taxes.

In countries such as Spain, holding companies have exemptions from Property Tax, if they meet all the requirements. As you can see some countries of high taxation protect the holding companies as it happens with the "coordination centers", which are subsidiaries of multinationals that provide services to the parent company (credits, sales, treasury and administrative management). 

The countries most in demand to register holding companies are Ireland, the Netherlands, Luxembourg, the United Kingdom, Austria, Denmark, Switzerland, Cyprus and the Madeira Islands. The countries eligible to open a holding company are those where there are no or very low taxes. An example we could see is a holding in Belize where your taxes are 0% or in Cyprus where the corporate tax is 12.5%. It must also be taken into account that in the country where the holding company is incorporated, they don’t get taxed on world income. 

Uses of a Holding company

The usual use of a Holding company is to raise the money of a company that is developing an activity where it is not a resident, for example, a holding company in Belize that owns 100% of shares of a French company. The holding company will deposit money through loans, royalties and exploitation rights because if the French company distributed dividends it would become a subject to tax. 

Another use that holding companies have is to reinvest the profits they have obtained in other companies of the same group in the form of loans so that the high taxation company can deduct the interest on the requested loans.