A holding is a business structure that includes a management or holding company that owns a controlling or complete stake in other, smaller companies included in this structure. They are called operational or subsidiaries and conduct diverse activities in the territory of one or several states (international holding). The management company is the parent company in relation to the operating ones.
The Main Tasks and Goals of the Holding Company
A holding company is a popular business optimization tool. It has the following tasks:
- Ownership of other companies’s shares that are included in the holding.
- Implementation of the subsidiaries’ general management, and control of their financial activities, and business strategies.
- Providing operating companies with technical, financial, and specialized assistance to improve their work efficiency.
The purposes for starting a holding company include the following:
- Business development and expansion, combining various areas of activity with the delimitation of responsibility of each department for the results of its work.
- Asset consolidation is beneficial in attracting cheap credit resources and investments from strategic investors, as it increases the capitalization ratio and demonstrates the holding’s solvency and financial stability, which can also give advantages in tenders.
- Protection of assets of the holding companies from creditors in the face of the unprofitability of one of the activities.
- Expenses optimization by reducing tax deductions, ensured by the unimpeded capital movement between the holding divisions and the ability to deposit and withdraw funds in a jurisdiction with minimal corporate income tax.
- Ensuring the confidentiality of beneficiary data.
The holding organizational structure is represented by the main management company (holding company) and subsidiaries, which in turn can be parents for other companies (they are called second-tier subsidiaries of the holding company). If the management company is part of a larger association, such as a conglomerate or corporation, it can also act as a subsidiary in the holding.
The holding structure may have the following constructions:
- Classic arrangement — in this situation, subsidiaries do not own shares of the management company or have insufficient shares to influence managerial decisions.
- Cross-species arrangement — two companies have a majority stake in each other.
The holding organizational structure can be presented in the following forms:
- A Limited Liability Company, LLC, which encompasses one or more parent communities.
- Corporations, conglomerate — a larger and more complex combination of companies of different activities.
Depending on the size of the authorized capital of the holding’s subdivisions, their activity areas, production technology, and other factors, the association of companies can be the following:
- Horizontal — such holding unites homogeneous businesses.
- Vertical — combines companies that perform separate steps of the same process to create a closed production cycle.
- Diversified or conglomerate — these are large holdings, concerns, financial and industrial groups, uniting companies engaged in different business areas.
The structure that is chosen when creating a holding is dependent on the objectives of the managing company and the corporate and tax legislation in a particular jurisdiction.
What Are the Advantages of Holding Companies
The holding company has the following advantages:
- Expansion with minimal initial investment.
- Income diversification that reduces business risks.
- The reduction of holding company operating costs and increase in business efficiency are due to the agreed financial, credit, and investment policies. The ability to redirect capital from one area of activity to another, depending on the market situation, is also a factor.
- Large growth potential due to the pooling of resources of subsidiaries, issue, and public placement of additional shares in the stock market.
- Enhancing the legal entity’s image as a large integrated commercial entity.
Weaknesses of the Holding Company
Along with the obvious and undeniable advantages, a national or international holding company has some disadvantages:
- Double taxation and increased tax payments in some jurisdictions abroad if the parent company owns less than 80-90% of the shares of subsidiaries.
- Changing the valuation of assets that have been presented as collateral for loans or interest rates on loan obligations is a risk in case of debt-financed expansion.
- The complexity of the holding management company’s structure and the large bureaucracy apparatus are especially noticeable when combining different companies with different activities. All this carries risks of abuse of supervisory and managerial functions and depriving subsidiaries of necessary autonomy.
- Responsibility for the activities of the subsidiaries if the decisions of the managing company resulted in their bankruptcy.
Holding Company Types
In building a holding company, you can choose a management company based on different criteria:
- Main functions and types of work:
- A pure holding company — it does not engage in the production of goods, services, or other commercial activities, but only owns the shares of its subsidiaries, generally managing and controlling them.
- A mixed-type management company that not only supervises and manages subsidiaries and sub-subsidiaries but also operates its own business — provides services or produces products.
- Places and roles in the holding structure:
- A direct holding company, which is the main management company of the group.
- While an intermediate parent company owns the shares of its subsidiaries, it is also a subsidiary of a larger holding company.
Examples of Holding Companies in Business
Today, holding companies are the basis of many well-known corporations, for example:
- Nestle S.A. is a Swiss multinational beverage and food company. it is the parent company of Maggi and Nestlé Nespresso SA (Switzerland), Crosse & Blackwell (United Kingdom), Purina PetCare Company (United States), Nestlé UK Ltd (United Kingdom) — manufacturer of Kit Kat, Rolo and Aero, Alcon Laboratories, producing eye care products, Sanpellegrino SpA (Italy) and others.
- An American multinational corporation known as The Walt Disney Company is a perfect example of what a media holding is and how it works. Its subsidiaries are Walt Disney Pictures, Pixar, 20th Century Studios, Disney Theatrical Group, Lucas Film and others.
- Samsung Group is a South Korean manufacturing conglomerate that owns more than 80 companies producing electronics, home appliances, telecommunications equipment, aircraft engines, gas turbines, and other goods.
- Procter & Gamble is the largest American consumer goods manufacturer. It is a multinational holding company that holds shares in Norwich-Eaton Pharmaceuticals, Wella AG, Tambrands Inc., Gile, Un GmbH, and other companies, for which it is the parent company.
Where Is the Most Suitable Location to Register a Holding Company?
The best place for opening and registration of the holding head company is a jurisdiction with a favorable tax regime which means low or zero rates for income tax, received from dividends and corporations. In this case, there is no need to transfer assets and production capacities to a country with a mild tax climate. Just learn how to establish and register a management company in that location.
Advantages of Creating a Holding in the UAE
The UAE is the most attractive of all the jurisdictions where businessmen from different countries choose to build a holding structure. Registering a holding company in the United Arab Emirates includes the following advantages:
- No taxes on dividends, assets, royalties, and capital gains.
- Minimum tax on corporate income (9%). But when creating a holding company in the free zone of Dubai and other emirates of the country, you are provided a zero rate for this tax for a period of 15 to 50 years, depending on the selected zone.
- No restrictions on the input/output of capital and received profits.
- The possibility of obtaining the status of a tax resident of the UAE, which protects against double taxation (the Emirates signed agreements with 128 countries of the world).
- Data confidentiality about the beneficiaries of the company and its activities. It is ensured by the lack of automatic exchange of tax information.
How to Open a Holding in the UAE?
Creation of a holding company in the UAE makes you do the following:
- Develop a business concept and decide on the holding structure.
- Select the company’s activity, its type, legal form, and registration place (emirate, free zone).
- Obtain the necessary approvals from government bodies and departments.
- Obtain appropriate licenses.
- Go through the procedure of registering a holding in the UAE with the Ministry of Economy, when opening a company on the mainland, or with the Free Zone management authorities, if you have chosen an onshore or offshore company in the free zone.
- Open a corporate account in one of the UAE banks.
- Apply for resident visas if you have chosen one of the types of onshore companies.
How Much Does It Cost to Create an International Holding Company in the UAE?
How to establish an international holding company for cheap? The cost of registering a management holding company in the Emirates depends on the following factors:
- Type and organizational structure of the legal entity.
- Registration place.
- Types of activities and the number of required licenses.
- Office size influences the rental cost.
- Number of resident visas.
If you want to open an international holding company in Dubai, Abu Dhabi, and other emirates of the country, we recommend that you contact specialists. They know how to set up a new holding structure, all the nuances of UAE legislation, what’s holding and a holding company, and what’s happened when you try to create the proper holding structure. Dynasty Business Adviser offers assistance from different specialists.
We are a licensed registrar of onshore and offshore companies in the United Arab Emirates and will help you create an international holding company with the registration of a management company in Dubai and any other emirate in the shortest possible time with minimal participation.