What are the benefits of creating a holding company

Creating holding companies is the way to build company groups. The holding company – considered the “parent company” – allows for holding stakes in several different companies. While the financial role of holding companies is often highlighted, you also benefit from other advantages relating to their management and leadership, as well as legal and tax matters.

What is the principle behind holding companies?

The purpose of holding companies is to financially control other companies by bringing together several shareholders or partners. The parent company holds equity interests in the share capital of the companies it oversees. These may be shares or units, depending on the legal status of the companies involved. This structure makes it possible to establish a unified management approach.

Holding companies can adopt various legal statuses: SA, SAS, SARL, partnership (civil company), etc. They do not directly carry out a commercial or industrial activity, since their role is financial.

The two forms of holding companies

Holding companies can be:

• passive, or management holdings, if they manage a portfolio of securities without employing staff;
• active, or animation holdings: in addition to managing the portfolio, they get involved in certain areas of the group’s companies, for example by carrying out administrative, accounting, or legal tasks, which allows them to benefit from tax advantages.

Holding companies can specialize according to the activity of their subsidiaries: air transport, new technologies, communications, financial activities, etc. It is also common to establish family holding companies in which all the shares are held by members of the same family.

The process of setting up a holding company

The first task when creating a holding company is choosing its legal status. The SAS (Simplified Joint-Stock Company) form is the most favored, due to its contractual and statutory flexibility. This status also benefits from a strong intuitu personae character (consideration of the co-contracting party’s identity), which gives shareholders significant leeway to insert customized clauses and create a holding company well suited to their situation.

Whatever legal form is chosen, articles of association must be drafted to officially define the form of the company, the names of the shareholders, the amount of share capital, the registered office, the company name, its corporate purpose, and its duration.

Finally, the share capital must be deposited into the holding company’s business account, and the notice of incorporation must be published in a legal announcements journal.

The objectives of holding companies

Choosing to create holding companies allows for pursuing various objectives:

• mobilizing capital and its profitability;
• bringing together active investor partners to pursue a coherent investment policy within the group;
• share exchanges and mergers between subsidiaries;
• individual control of the various operating companies, etc.

When should you create a holding company?

Depending on the objectives pursued, setting up a holding company occurs in specific situations:

• when it becomes necessary to create one or more subsidiaries;
• when acquiring a company;
• as part of a leveraged buyout of a company;
• to benefit from tax advantages;
• to optimize an estate, etc.

The benefits generated by holding companies

The benefits of creating holding companies relate to group management, as well as legal and tax advantages.

Management-related benefits

Setting up a holding company makes it easier to manage and control several companies, thanks to the existence of the parent company. Investment is also simplified, while still maintaining full control over the subsidiaries.

Subsidiaries and their parent company enter into service agreements that may cover accounting, administrative, or legal tasks. In addition, signing cash pooling agreements between the group’s various entities facilitates investments by using internal resources, thus avoiding the need for a bank loan.

Legal benefits

In the case of a passive holding company – which by its very nature does not take part in commercial activity – the legal benefits are limited solely to managing equity interests.

In the case of an active holding company, in addition to simplified management of equity interests, the legal benefits extend to the oversight and service provision role toward the subsidiaries, since the parent company carries out an actual commercial activity.

Tax benefits

The main tax benefits of holding companies are numerous.

Under Article 145 of the French General Tax Code, a parent company holding a stake of at least 5% in a subsidiary benefits from an exemption on dividends received from that subsidiary, subject to taxation of a 5% share of costs and expenses.

Articles 223-A to 223-Q of the French General Tax Code define the tax consolidation regime, under which the parent company alone is liable for corporate income tax for the entire group. The conditions to benefit from this are as follows:

• all companies subject to corporate income tax (IS);
• the parent company holds at least 95% of the subsidiaries;
• the holding company itself must not be held at more than 95% by a company subject to corporate income tax.

Territoriality rules may also apply as additional conditions for subsidiaries.

In addition, holding companies benefit from the Dutreil pact under Article 787-B of the French General Tax Code, the contribution-sale mechanism under Article 150-O-B of the French General Tax Code, and the gift-sale mechanism.

The role of holding companies in business transfer

Holding companies are often used for business transfers, as they facilitate taking control and power. Beyond the tax advantages mentioned above, they simplify investments as well as repayments.

Family holding companies are particularly popular because of the advantages they offer heirs, allowing them to limit the initial contribution at the time of transfer. The family holding company also provides the means to buy back the subsidiaries’ shares, then proceed with a gift to share them among heirs.

Nothing prevents liquidating the holding company once the transfer process is complete and the loans have been repaid.

The constraints of a holding company

Setting up a holding company comes with constraints that should not be overlooked.

You are required to appoint two statutory auditors, under certain conditions, for consolidated accounts, which can generate significant costs.

In addition, the tax complexity of this type of company generally requires professional support for transactions carried out between subsidiaries and the parent company.

Finally, monitoring management requires expertise, as it is important to avoid depleting the holding company’s capital. Otherwise, losses can be substantial.

While a holding company offers many advantages, it is worth carefully considering its formation and seeking professional support if your knowledge of business management is limited.