When may a holding company be appropriate?

CEO of Euro-Phoenix

All blogs by Les Nemethy

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Most small to mid-sized businesses have no need for a holding company.  It may be sufficient for the company owner(s) to personally own shares or a quota directly in the company in question.  This article will look at a number of instances where a holding company might nevertheless be advisable. 

I will look at three types of reasons for setting up a holding company: (a) corporate governance; (b) financial; and (c) taxation.  I will then conclude with a few ideas on things to watch when setting up a holding company.

(a) Corporate governance

I am currently advising the owner of a group of companies who has numerous corporate entities which are held by him personally.  He exerts his control directly over each company, and his personal control is really the only institutional link among the various corporate entities.  At some point in the evolution of this group of companies, they will require a common management team to provide coherent leadership.  This could be achieved by interposing a holding company that provides direction to the operating entities. 

If a strategic or financial investor were to invest in such a group of companies, they would likely insist on a holding entity, as it would not be practical to appoint board members to each entity, and then somehow try to coordinate so many entities.  It is much simpler to provide coordinated governance for a group of companies at the level of a holding company.

(b) Financial reasons

It is usually easier to obtain both debt and equity financing when you have a holding entity (e.g. usually with consolidated statements).  Such an entity is usually larger and more diversified than any single subsidiary, and therefore has less risk.  This should result in lower costs of capital.  It may also save transaction costs (for example, one loan for the group, rather than separate loans for each of the operating companies).

(c) Taxation reasons

Significant tax advantages may be achieved by interposing a holding company.  Dividends may flow tax free or at lower tax rates than if an owner were paying taxes to himself or herself personally.  In certain jurisdictions, the sale of subsidiaries may be free of any capital gains tax.  Therefore the jurisdiction in which the holding company is incorporated is of paramount importance—it generally pays to incorporate a holding company in a jurisdiction that has tax treaties with all the countries in which the subsidiaries operate.   This helps avoid double taxation.   It is extremely important to obtain advice from tax experts for the purposes of tax planning (which is perfectly legal) and make sure you are not entering the realm of tax evasion (which is illegal).

In short, the reasons for creating a holding company may be quite compelling.  It is very important to ensure that when a business owner sets up a holding entity, and transfers ownership of operating companies from personal ownership to the holding entity, that this does not trigger a taxable event, or if it does, that the tax implications are manageable.  If you are contemplating building a business empire that spans many companies, it may be advisable to create the holding structure as soon as possible to avoid the potential tax liability upon such transfers.

Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (), a Central European corporate finance company focused on Mergers & Acquisitions.  He is the author of “Unlocking your Company’s Value”, available at