A holding company is a company that doesn’t have any operations, activities, or other active business. Instead, it owns assets. These can be shares of stock in other corporations, limited liability companies, limited partnerships, private equity funds, hedge funds, publicly traded stocks, bonds, real estate, song rights, brand names, patents, trademarks, copyrights, or virtually anything else of value.
A holding company is therefore a company that owns other companies or outstanding stock. The term usually refers to a company which does not produce goods or services itself. Its purpose is to own shares of other companies.
Holding companies can be beneficial as they provide less risk for the owners and can allow the ownership and control of a number of different companies. In the United States 80% or more of stock in voting and value must be owned before tax consolidation benefits, such as tax-free dividends, can be claimed.
Sometimes a company intended to be a pure holding company identifies itself as such by adding “Holdings” or “(Holdings)” to its name.
Changes to the Italian tax code have increased the attractiveness of using an Italian corporation (“ItalyCo”) as a holding or a sub-holding company in a multinational group. In particular, the new participation exemption regime, the new group taxation, and the new interest deductibility rules.
A holding company provides a means of concentrating control of several companies with a minimum investment. Other means of gaining control, such as mergers or consolidations, are more complicated legally and more expensive. A holding company can reap the benefits of a subsidiary’s goodwill and reputation while limiting its liability to the proportion of the subsidiary’s stock ownership. The parent company in a conglomerate corporation is usually a holding company.
Strictly speaking, the term “holding company” might be used to describe any company that owns a majority of shares in another company; however this may only apply if that corporation’s only reason for existence is to hold stock in other companies. Usually, though, the term signifies a company which does not produce goods or services itself, but, rather, whose only purpose is owning shares of other companies (or owning other companies outright). Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies.
The owned companies may be: subsidiary companies – the holding company owns more than 50% thus giving control, associated companies – the parent company owns 20-50%, or related companies as similar to associated companies. As associated companies are large shareholdings, they should provide considerable influence (but not control) over the associated company. Owning 49% and wanting control when a rival company has a 51% stake may be a less than appropriate strategy. Related companies typically own fewer than 20% of shares in another company. This holding may be held because good dividends may be expected or the two companies are co-operating with each other in some area of business. Small shareholdings may be held by banks, Unit or Investment Trust companies as aspects of their portfolio of ownership.
For example, Italian law imposes a domestic capital gains tax on the gains that non-residents derive from selling Italian company shares. If a UK company also wholly owned an Italian subsidiary, assuming that it held the shares of Italian company under the terms of an agreement with its offshore parent of the kind just outlined, then a treaty exists between Italy and the UK giving taxing rights to the UK.
The articles of the treaty governing the distribution of dividends, interests and royalties, stipulate that the recipient of the distribution must go to the beneficial owner of such income in order to benefit from the treaty provisions. The UK-Italian treaty can then be used to claim treaty exemption from capital gains tax in Italy for a UK company holding shares in an Italian company, although it must be held under a division of share rights agreement.