What is a holding company?
A holding company (or parent company) exists mainly to own shares in other companies. It may also own intellectual property, property or other assets that it licenses or leases to its subsidiaries.
Why businesses use them
- Risk separation: problems in one subsidiary don't automatically threaten the others.
- Simpler investment: investors can buy into the whole group through one entity.
- Asset protection: valuable assets can be held away from trading risk.
- Tax planning: some jurisdictions allow tax-free dividends between group companies.
- Easier acquisitions and disposals: buy or sell a subsidiary without restructuring the whole business.
Accounting
If the holding company controls its subsidiaries, it usually must prepare consolidated financial statements that combine the group as if it were one entity, under IFRS 10. Transactions between group companies are eliminated.
Example
Founders set up HoldCo Ltd, which owns 100% of a retail company and 100% of a property company. The property company owns the shops and rents them to the retail company. If the retail business fails, the property is protected in a separate entity.
Considerations
Holding structures add administrative costs, extra filings and transfer pricing rules, so get professional advice before setting one up.