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Definition of a holding company
If you're wondering what a holding company is, Cabinet Sion Avocat offers a simple definition. A holding company is a legal entity that groups together the financial interests of several other companies. A holding company is therefore a company that holds shares in one or more other companies, commonly referred to as "group companies".
How does a holding company work?
A holding company doesn't sell anything, it doesn't market products or provide services. In fact, the holding company's sole activity is financial, i.e. investing in the various entities of the group, which may be called subsidiaries. Thus, a holding company's sales will derive from the subsidiaries' financial income, in this case dividends. To a certain extent, the holding company may offer consulting services to other group companies, with management fees, but it never intervenes in the development of subsidiaries, nor does it manage these companies.
Passive and active holding companies
A holding company can therefore be used to form a group of companies. The associates of the holding company, also known as shareholders, can be involved at several different levels:
- by holding financial securities, which enables the holding company to earn financial income, which is then redistributed in the form of dividends to shareholders. In this case, we speak of a passive holding company.
- through the provision of services by the holding company to its subsidiaries, in addition to financial income. In this case, the holding company receives management fees, and is referred to as an active holding company.
What is the purpose of a holding company?
But why set up a holding company? Cabinet Sion Avocat offers a simple answer: to benefit from the tax advantages of this system. In fact, the very mechanism of the holding company makes it possible to optimize the taxation of the entire group, holding company and subsidiaries.
In the case of an active holding company, the services provided by the holding company to its entities will represent :
- a portion of the holding company's sales (subject to corporate income tax)
- an expense for the subsidiary benefiting from the service (deductible from taxable income)
So, to put it plainly, a (taxable) product on the one hand, will be a (deductible) expense on the other. This rebalancing ensures a minimum tax liability for both entities, if the price is right, while remaining within the tax law, of course!
Note that a holding company is also necessary in the case of a company buy-out via an LBO.
Holding company and taxes: explanations
There are two different tax regimes for holding companies, as described below.
The tax reintegration system
To benefit from this system, a number of conditions must be met. In order to benefit from tax reintegration, the holding company must not be 95% or more owned by another company, it must itself own at least 95% of the capital of its subsidiaries, all the companies in the group, including the holding company, must be subject to corporation tax (IS) and, lastly, they must all close their annual accounts on the same date.
If all these conditions are met, then the profits and losses of all entities will be taxed at the same time. In other words, the losses of some companies can offset the profits of others to achieve global taxation. Or, as Article 216 of the French General Tax Code puts it: "A global result is determined by the parent company by making the algebraic sum of the results of each of the companies in the group". This regime is ideal when certain entities need to make major investments, and may therefore make a loss in certain years, with these losses offsetting the profits made by other subsidiaries.
Parent subsidiary regime
If the holding company has held a stake of at least 5% in another company for more than two years, it can opt for the so-called "mother-daughter" tax regime. The parent company, as the holding company is often called, and the subsidiary(ies) must be subject to corporation tax.
If these two conditions are met, the profit is taxed solely in the daughter company that generated it. Dividend-generating net income is passed on to the holding company, but benefits from a tax deduction of 95% of its value. In other words, the dividends received by the holding company are virtually tax-free... In other words, if the holding company's sales consist solely of financial income, it will only be taxed on 5% of this. In addition to the obvious tax optimization benefits, this system avoids double taxation of the parent company, the holding company, and the daughter company, the subsidiary.
Advantages and disadvantages of a holding company
Are you wondering about the strengths and weaknesses of a holding company? Cabinet Sion Avocat explains below.
The main advantage of a holding company is, of course, tax optimization, as described above in the two possible regimes. There are other advantages too, notably from a legal point of view, since a holding company allows shareholders to be diluted while retaining overall control, and also from a pooling point of view, since services can be used by all the companies in the group in the case of an active holding company.
On the downside, the main drawback is the tax complexity of the holding company, as well as the potential risk of fraud in the event of tax over-optimization. This is why it is highly recommended to set up a holding company yourself, but you need the support of a tax lawyer to do so.
How do you set up a holding company?
Setting up a holding company is similar to setting up a corporation. A holding company may take the legal form of an SAS or a SARL, but the main difference is its corporate purpose.
However, setting up a holding company is complex, since its main activity consists of acquiring shares in other companies - subsidiaries - and therefore follows strict legal procedures. To set up a holding company, you will need to call on the services of a lawyer and, potentially, a chartered accountant. And it's advisable to use the services of a tax lawyer to choose the holding company's tax regime and monitor its activities on an ongoing basis.
So, if you're looking for more information, or would like to set up a holding company, don't hesitate to contact Cabinet Sion Avocat, a tax lawyer in Marseille (and online!) specializing in tax optimization, who will be able to help and support you!
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