A holding company is a company that holds shares (normally, the majority interest) of other enterprises as its main activity.
A holding company may also keep in its possession other assets such as real estate and securities.
A holding company does not generally carry on standard trading or commercial operations.
Income of a holding company is usually "passive income" such as dividends, interest or royalties.
When registering a holding company it is important to consider all aspects regarding the country of incorporation. The key criteria which must be taken into account in choosing a jurisdiction where to have a holding company registered are as follows:
- The number of double tax treaties concluded by the particular country. Where a double tax treaty is enacted between the country where a holding company is registered and the country where its subsidiary is located, the dividends of the latter may be paid to the parent company with beneficial conditions.
- Conditions applicable to the criterion of "participation exemption". This term means that, subject to certain criteria being met, the income derived by the company as dividends or capital gains is either taxed with beneficial conditions, or such income is fully tax-exempt. The criteria that determine a participation exemption or absence of it may include:
- The length of a period in which the parent company holds shares of its subsidiary. As an example this may be not less than twelve months.
- The parent company’s interest in its subsidiary’s authorised capital. As an example this may be at least 25%, or not less than 100.000 EUR.
Popular holding jurisdictions include Cyprus, Denmark, the Netherlands, as well as other countries.
When structuring holding operations the following legal aspects may also be of importance:
EC Parent Subsidiary Directive. In accordance with this Directive a company being a taxpayer in any European Union country may receive dividends from its subsidiary in another European Union country with no withholding tax being levied in such other country.
ЕC Interests and Royalty Directive. This Directive came into effect on 1st January 2005. According to it, the interest and royalty payments shall be exempt from any taxes in any European Union country where they arise provided that the company being a recipient of the payment is a related company as well as being a tax resident of another European Union country.
Additionally, in both of the above cases the company receiving the income must be the final beneficial owner of such income in that it must derive this income for its own benefit rather than as аn intermediary, agent or trustee acting in the interests of a third party.
Arms length principle. This is compliance with the market conditions in that the transaction is performed on the condition that both companies are independent of each other. Benefits under the ЕC Interests and Royalty Directive will not apply to payments for amounts that are above the actual market value.
Lexon Incorporations will provide the incorporation of a holding company in the jurisdiction that optimally conforms to the entrepreneur’s objectives.