For a number of entrepreneurs this will be a difficult question, because they are not exactly familiar with the advantages of setting up a holding company. While the holding structure can offer many legal and tax advantages. Reason enough to list these advantages (again).
A private limited company can be divided into roughly two manifestations: an operating company and a holding company. The daily business activities will be executed form the operating company. For example, the hiring of staff and the delivery of products or services. It is possible to establish a holding company in addition to an operating company. A holding company is used to house important assets, such as real estate and profit. The holding company is shareholder of the operating company, so that a mutual relationship is created between the two companies. All the shares of the holding company are held by a natural person. A new company is placed between the shareholder and the operating company. But what exactly is so convenient about this?
1. Risk spread
First of all, this construction allows the entrepreneur to better spread the risk. All valuables are housed in the holding company. In this way, the assets transferred are not involved in a possible bankruptcy of the operating company.
Assets that are often transferred to the holding company are real estate and the profits made by the operating company. The second advantage relates to that profit. The profit is first taxed in the operating company for corporate income tax purposes and can then be transferred to the holding company tax-free through the so-called participation exemption. This exemption prevents double taxation. Incidentally, income tax an dividend tax are still due at the moment the profit is distributed to the entrepreneur in private.
3. Offset losses and profits
The third advantage is another tax advantage. If the holding holds all the shares in the operating company (or at least 95% or more), a tax unity can be formed for corporate income tax purposes. The advantage in this case is that the results of the operating company are allocated to the holding company. Thus, the losses of one company can be set off against the profits of the other company.
4. Flexibility when selling shares
A final advantage is the flexibility in the event of a sale of shares of the operating company. As soon as the shares in the capital of the operating company are sold, and there is not a holding company, income tax is due on the profit from the sale of these shares. If there is a holding company, the profit from the sale of the operating company will end up in the holding company. The holding company does not have to pay any tax related to this profit.
Setting up a holding company right now, or at a later moment?
We often advise to set up a holding company directly when setting up an operating company.
The disadvantage may be that you incur more costs at the start of the company, because you are setting up two companies. In addition, you need to keep records for both companies, as well the obligations to prepare the annual accounts.
It is possible to place a holding company between the operating company and the entrepreneur at a later stage. The shares in the operating company are transferred from the entrepreneur to the holding company.
However, moving a holding company afterwards requires extra attention and often higher notarial costs. In addition, a tax consultant must draw up a contribution description. Ultimately, this will be a more costly affair than setting up a holding company at the same time as the operating company.