Another reason the holding company could be implemented is because of the potential tax benefits it can bring. The first is that for holding companies that receive dividends from subsidiary companies there is usually no need to pay corporation tax on dividends received. This means that dividends can be paid up to the holding company without incurring any additional tax liabilities. Now you might wonder why this would be beneficial, after all the profits would still be “stuck” within another company structure and when that profit is later distributed to shareholders income tax would still potentially be incurred. This is true but the ability to control the timing and form of distributions can be a very powerful planning tool. Below we will look at an example where the ability to move profits upstream can be very useful from a tax perspective.

Example

The other key exemption for holding companies is the ability to apply for a substantial shareholding exemption when disposing of shares in a subsidiary company. To qualify for the SSE the following criteria must be met:

• The holding company must have held at least 10% of the subsidiary’s shares for at least 12 months beginning no more than six years before the disposal
•  The company being sold must be a trading company or the holding company of a trading group or sub-group

Up until this point we have only considered simple UK group structures where both the holding company and it’s subsidiaries are based in the UK. Of course some structures will consist of offshore holding companies who own UK subsidiaries. In fact you may be familiar with the high profile cases of companies like Google and Starbucks which have made the news headlines but not always for the right reasons.

When a holding company is based outside of the UK this can create some additional opportunities for tax planning. 

The biggest opportunity is to simply shift profits offshore before tax has been applied in the UK and move those profits to a country with a lower rate of corporate tax (or better yet a country that doesn’t apply corporate taxes). This is the technique that many will be familiar with if you’ve followed the cases of Google and Starbucks. Typically the holding company based overseas would charge the UK trading company a fee each year that would reduce the UK trading company’s profits and subsequent corporation tax liability. The overseas holding company may then be taxed on it’s income but usually at a lower rate than would have been the case in the UK. These intercompany charges can take a number of different forms but some common examples include:

1.  Management charges – The holding company invoices the subsidiary for administration expenses throughout a period, this could include a share of head office running costs, staff costs etc
2. Interest charges – The holding company lends money to the subsidiary and then charges interest on the outstanding loan balance
3. Intellectual property fee – The holding company charges the subsidiary for the right to use the brand and it’s intellectual property

If you are considering introducing a UK holding company to your business structure then you’ll be pleased to know the process is relatively straightforward and would typically involve two key steps:

1.  The first step is to form the new holding company. This would involve the same process used when forming any other UK limited company and requires a registration at Companies House. The new company name, details of shareholders and the company’s registered address are some of the details that will need to be provided.
2. The second step is for shareholders in the trading company to swap their shares for shares in the new holding company. This is done by way of a share for share exchange and will require the submission of a share transfer form to Companies House. Although technically a disposal of shares in the trading company would have taken place this is usually managed in tax neutral way meaning that no tax would be payable.