What is a holding company?
A holding company is a very specific type of business that usually conducts no activity itself other than owning, or “holding”, shares in another company, receiving dividends from its subsidiaries, protecting itself and its subsidiaries from takeovers, and disposing of shares in its subsidiaries.
Section 1159 of the Companies Act 2006 sets out that: A company is the “subsidiary” of another company, its “holding company”, if that other company –
- holds a majority of the voting rights in it, or
- is a member of it and has the right to appoint or remove a majority of its board of directors, or
- is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
The structure and purpose of a holding company varies: some are simply private investors, holding shares in a subsidiary and receiving dividends but playing no part in the management of the subsidiary or its activities; other holding company structures have voting rights with an active role in the running and management of their subsidiaries.
Tax liabilities
The majority of dividends a holding company receives from any UK subsidiaries should be exempt from tax, which is one of the major attractions of this type of company. Additionally, provided the holding company holds at least 10% of the ordinary shares in a subsidiary for a continuous period of 12 months before and after any share disposal, it can dispose of its shareholdings in an active subsidiary without being liable for capital gains.
HMRC states that a holding company is not liable for VAT if their basic functions are to:
- Acquire shares in subsidiaries
- Receive dividends arising from the shareholdings
- Defend itself and its subsidiaries from takeovers
- Dispose of shares in subsidiaries
These activities are not considered ‘taxable supplies’ and are therefore not liable for VAT, nor is the holding company permitted to register for VAT if these are the only activities it carries out. A holding company that provides or intend to provide taxable supplies to a subsidiary, such as management services, will be permitted to register for VAT and must do so if their annual taxable supplies exceed £79,000 (2013-14 VAT threshold)
Company name
Using the word ‘holding’ or ‘holdings’ in your company name will imply it carries out a specific function. These are considered ‘sensitive’ words and if you wish to include either of them in your company name, you are legally required to write to Companies House for permission and provide evidence that you hold more than 50% of the issued share capital of a subsidiary, or you plan to do so within the next 3 months. You can submit this information electronically at the time of company registration if you use Rapid Formations or any other online company formation agent to set up your holding company.
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