When to set up a holding company (and when not yet)

It is a company that sits above your operating company: you own the holding and the holding owns the company that sells.

It separates two things that are mixed up in a single company: the business that operates and the money that business generates. With a holding, profit can leave the operating company without reaching your pocket, and from there be invested in another company, another project, or kept away from the operating risk.

If the holding owns in the subsidiary:

• a stake of at least 5%, and
• keeps it for one year (before the distribution, or completing it afterwards),

the dividends it receives and the capital gains if it sells the stake are 95% exempt. The remaining 5% is treated as non-deductible management expenses and is taxed: at the standard 25% rate, the dividend is taxed at around 1.25% inside the holding.

There is a special rule for small holdings: if the company had turnover below €40 million, wasn't part of a group before and creates a new subsidiary whose entire capital it owns, the dividends from that subsidiary in its first three years are 100% exempt. This rule applies to dividends, not to capital gains.

• It doesn't make income tax disappear. When money leaves the holding to you, as a dividend or as a salary, it is taxed in your personal income tax as always. The holding changes when it goes through your income tax, and if you reinvest it, it may never do so.
• It isn't useful if you spend the profit. If every year you take out everything the business earns to live on, the holding just adds a company to maintain.
• It isn't free. It's another company, with its own accounts, its own taxes, its annual accounts filed at the Companies Register and notary costs when it is set up.

The usual route is a share exchange: the shareholders contribute their shares in the operating company to a new company (the holding) and receive shares in it in return. The holding ends up with the majority of the operating company.

Under the special restructuring regime of the Corporate Income Tax Law (articles 76 to 89):

• You aren't taxed at that point on the gain on the shares you contribute.
• The shares you receive keep the tax value and the date of the ones you handed over.

Two conditions that are not a formality:

• Valid business reason (article 89.2). If the main aim is just a tax advantage, the tax agency can withdraw the regime. Reorganising the group to fund new businesses is a reason; the tax advantage on its own is not.
• Notify the transaction to the tax agency on time. Not doing so is a serious infringement.

If the transaction raises doubts, you can submit a binding ruling request to the Directorate-General for Taxes before carrying it out.

If more than half of a company's assets are securities or assets not used in a business activity, the law treats it as an asset-holding entity (article 5.2). For a holding, stakes of at least 5% held for a year or more don't count as securities if the holding has the material and human resources to manage them.

An asset-holding company can't use the reduced corporate income tax rates and is taxed at 25%. The holding has to genuinely manage, not be an empty box.

Not yet:

• If it's your first business and you don't know yet whether it works. Setting up two companies on day one means paying for a structure you may never use.
• If you take out all the profit every year to live on.

Yes, or at least worth looking at:

• The business has already shown it works and generates more than you need to take out.
• You want to reinvest in other projects or companies.
• There are several partners with different plans for their share of the profit.
• You think you may one day sell the operating company.

The right moment is usually before profit gets large: afterwards, the reorganisation is harder to justify and to carry out.

If the holding owns at least 75% of the capital of its subsidiaries and the majority of the votes, the group can file on a consolidated basis: a single corporate income tax return in which one company's profits are offset against another's losses. It's optional and has its own admin cost. It's mainly useful when a new business is going to make losses in its first years.