What is a Holding Company (Holdco)?
A holding company (Holdco) is a business entity, usually a corporation or LLC, that doesn’t manufacture anything, sell any products or services, or conduct any other business operations. Its purpose, as the name implies, is to hold the controlling stock or membership interests in other companies. Some of the subsidiary companies it owns do manufacture, sell, or otherwise conduct business. These are called operating companies. Other subsidiaries hold real estate, intellectual property, vehicles, equipment, or anything else of value that is used by the operating companies.
The holding company (Holdco) can own 100% of the subsidiary, or it can own just enough stock or membership interests to control the subsidiary. Having control means it has enough stock or membership interests to ensure that a vote of owners will go it’s way. This can be 51%, or where there are many owners, it can be a much lower percentage. Each subsidiary has its own management who run the day-to-day business. The holding company’s management is responsible for overseeing how the subsidiaries are run. Therefore, they can elect and remove corporate directors or LLC managers. They can also make major policy decisions like deciding to merge or dissolve. The people running the holding company do not participate in the operating companies’ day-to-day decision making.
Why use a holding company (Holdco)?
Placing operating companies and the assets they use in separate entities provides a liability shield. As a result, the debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.
For instance, our entrepreneurs’ horse farm is struggling and has been unable to pay its trainer and veterinarian. They can sue and reach the assets of the subsidiary that owns the horse farm but not the assets of the subsidiaries that own the restaurant and apartment building, or the holding company.
Control assets for less money
A holding company needs to control its subsidiaries but doesn’t necessarily need to own all shares or membership interests. That allows the holding company to obtain control of another company and its assets at a lower cost than if it had acquired all of the subsidiary’s ownership interests.
Lower debt financing costs
A holding company that has financial strength can often obtain loans for a lower interest rate than its operating companies could themselves, particularly where the business in need of capital is a start-up or other venture considered a credit risk. Subsequently, the holding company can obtain the loan and distribute the funds to the subsidiary.
Because operating companies are separate entities, there is less risk in investing in start-ups or other ventures that seem risky. For example, when one major global business restructured and formed another entity as its holding company, one of the reasons cited for doing so was that the shareholders were concerned about the risks from investments in non-core areas (e.g., robotics, life sciences, and medical research). By restructuring, those investments were separated from its core and profitable functions.
Day-to-day management not required
A holding company can own businesses in a variety of unrelated industries. It does not matter if the owners and managers of the holding company don’t know about those businesses because each subsidiary has its own management to run the day-to-day operations.
Why consider establishing a Holdco?
By establishing a RAK ICC company for holding of real estate (‘’RAK ICC Holdco’’), the client can enjoy several benefits. Below are some of the main advantages of a RAK ICC Holdco:
- reduce the client’s personal exposure to the risks and liabilities inherent with owning investment property;
- isolate income from a property or specific properties, simplifying bookkeeping and taxes;
- reduce the effective level of any withholding taxes on the income and capital gains;
- flexibility of transferring the shares upon selling the property;
- reduce inheritance tax through structuring the assets through a RAK ICC Holdco;
- maintaining privacy by keeping the client’s information confidential as there is no information on the ownership on a public register for the RAK ICC Holdco; and
- ability to open a local or an international bank account for the RAK ICC Holdco to receive rental income or for administering the real estate’s fees and payments to any property managers.
- pure equity holding companies are subject to reduced Economic Substance Requirements