To understand 4 advantages and 2 disadvantages!

Depending on your project, there may be advantages to forming a holding company but also some disadvantages. Do you think about the interests and risks of the holding company? Can the construction of the holding suit you?

4 Advantages of a Holding Company

There are many legal, financial and tax benefits of forming a holding company. As a pivot company of the group, it is also of interest for operations management.

1 – Legal advantage

The main legal advantage of a holding company in terms of controlling subsidiaries lies in its “leveraged” effect. If you want to buy or transfer a company, then this thing has to be kept in mind. The leverage effect would make it possible to control subsidiaries with a stake of less than 50%.

Takeover or LBO Case

In the context of an acquisition, the acquirer, through the holding company, would be able to control the subsidiaries or subsidiaries, while holding a de facto non-majority stake in them. The only requirement is to hold at least 51% of the holding company’s capital. If the latter also holds at least 51% of the subsidiary’s shares, in effect, the acquirer becomes the majority manager of the subsidiary (while owning less than 50% of its shares). Then he takes control of the company with the contribution of lesser amount.

This is the principle of the leverage effect.

property transfer case

The existence of family businesses may be threatened in the event of succession. Imagine that your successors do not have the same objectives (sell shares or continue the activity). Centralizing the holding of securities within a holding company makes it possible to limit the risk of future spreads. Then the majority holder of the holding company can indirectly control the subsidiary(s) in which its shares are not a majority.

It would also be possible to bring in new shareholders while maintaining control. You can fully anticipate and facilitate transmission by creating assets within the holding company upstream (the holding company).

2 – economic benefits

The holding company is also an effective financing instrument.

banking bargaining power

By centralizing control internally, the holding company benefits from consolidating its negotiating power with banks. Collective bargaining (for all subsidiaries) will make it possible to obtain more favorable financing terms. The borrowing capacity also increases as it is available at the dual level of the holding company and the subsidiary.

It is the financial equivalent of legal leverage.

cash flow optimization

In principle, banks have a monopoly on financial activities. But the Monetary and Financial Code (Articles 511-7) provides for the possibility of conducting cash transactions between companies with capital relations. One must have the power to control the others.

These transactions take the form of a “cash agreement” (omnium agreement) between the parent company and the daughters. They make it possible to optimize and balance the financial position of various companies (loan agreements, withdrawal of funds from beneficiary companies, redistribution of loss-making subsidiaries).

Leverage effect in the event of redemption (leveraged buy out)

A holding company can be an interesting tool in the event of an acquisition. The leverage effect will work here in terms of financing. The dividend paid by the acquired operating company (target) to the holding company will enable reimbursement of bank loans taken for the acquisition.

As we have already mentioned, the holding company can claim advantageous loan terms, which are therefore doubly attractive. Be wary of this type of operation that requires good financial health of the target company (it must be profitable).

3 – Tax benefits

Forming a holding company can (under certain conditions) allow you to benefit from two important tax provisions. The tax consolidation regime (Article 223A of the CGI) and the “mother-daughter” regime (Articles 145 and 216 of the CGI). It also allows you to avail benefits in the event of transfer or contribution of corporate securities.

tax consolidation agreement

Holding will once again play a key role. Thanks to this system, it is fully accountable for corporation tax at the group level. This would make it possible to integrate losses among the various subsidiaries into profits and thus reduce the overall tax base of the group. We find the compensatory logic of cash optimization.

Pay attention to compliance with the Terms of Applicability:

  • Companies that are subject to amalgamation must be subject to corporation tax;
  • Subsidiaries must be at least 95% owned (directly or indirectly) by the holding company;
  • The holding company should not be more than 95% owned by another company;

mother daughter diet

The holding company will benefit from tax exemption for dividends and income from subsidiaries with only 5% deduction (shares for costs and fees).

Without the benefit of this arrangement, dividends are taxed twice (at the level of the subsidiary and the holding company). There is therefore everything to be achieved, especially in the LBO situation, to optimize debt financing.

To avail this scheme, the following conditions have to be fulfilled:

  • Holding companies and subsidiaries are subject to corporate tax;
  • Titles must be held for more than two years;
  • The holding company must hold at least 5% of the share capital of the subsidiaries.

Advantages in terms of transmission

The instrument of Dutreil Pact (Article 787-7) of the CGI allows (subject to conditions) a waiver of up to 75% of the transfer fee in the event of a free transfer. However, it is necessary to ensure compliance with the exemption conditions and the holding company must be a leader and not a passive one.

Profit in case of contribution of securities

Do you offer corporate securities to the holding company you control?

It entitles you to deferment of taxation of capital gains (in case of detention for more than three years or in case of economic reinvestment). This is the contribution-assignment mechanism (Article 150-0 B Ter CGI).

It’s not a definitive exemption system, but it can be a relevant tax optimization tool in the context of your company’s resale. You should also be aware that capital gains will become net in the event of free transmission of shares of the holding company (for example to charity).

4 – Operating profit

A holding company is also a means of efficiently managing subsidiaries. As a pivot company, it facilitates management stability. If you have multiple operating companies, this allows you to establish a clear policy and general guidelines for all.

Forming a leading holding company makes it possible to group together the various support functions (HR, financial, administrative, legal, accounting, etc.) within it through the development of service provision agreements (management fees).

This centralization will automatically reduce management costs, and allow subsidiaries to concentrate on their activity. It is also possible to make physical resources (furniture and real estate) available through a holding company.

As you may have understood, the holding company allows you to optimize the operational management of your company.

2 Disadvantages of Holding Company

Despite its many advantages, there are also some disadvantages and disadvantages of holding that should be avoided.

1- Tax risk

This is an important point. The administration is careful about the financial and legal system.

The holding company offers very favorable tax measures. However, the risk of over-optimization is very real, with recovery at stake. There are several conditions to be fulfilled and administrative procedures to be carried out in order to benefit from various schemes.

We can only strongly advise you to surround yourself with professionals to support you in your project and avoid any risks. In particular, you have to be very strict with the holding company. Its “active” aspect should be fully delineated in the event of an audit by the tax authorities.

Example of service provision agreements (management fees): They are closely monitored by tax authorities. It may reject their deduction on the basis of the principle of abnormal act of management (jurisprudence). The assistant availing the service should be able to prove the genuineness of the service and the prices charged should be in line with the market.

Another disadvantage, most equipment mileage must be subject to corporation tax at the normal rate, which is not necessarily the case depending on your situation (IR or IS at a lower rate).

Also note that there is a disadvantage with respect to Value Added Tax (VAT). Since the holding company only receives dividends, it cannot deduct the VAT paid ordinarily.

The taxation of a holding company is a delicate point which deserves caution and rigor. To avoid any tax risks (misuse of corporate assets, unusual act of management), it is generally recommended to choose a “leading” holding company.

2- Administrative management of the holding company

Forming a holding company is like creating a full-fledged company, which includes everything it is comprised of. This is often for a good reason (the long list of benefits above) but it is a point that should not be overlooked. Once again, we advise you to stick with the project (choice of legal form, drafting statutes) after it is built, it will have to be managed (administrative management, accounting, land contribution for companies, etc.)

Like any other company, the holding company is subject to the obligation to prepare consolidated accounts if it meets two of the following criteria:

  • turnover above 48 million euros;
  • balance sheet above 24 million euros;
  • Workforce of over 250 employees.

Then it will be necessary to consider the cost of appointing two auditors.

With these advantages and disadvantages, is creating a holding company for you?

First, you must have a clear vision of your project and your needs.

Do you want to integrate, manage or broadcast your assets more easily? Diversify your business by acquiring new companies? Install an assistant? Or benefit from the many means of tax, financial and operational optimization permitted by the holding company?

It can be a good option in all these situations, but also consider the disadvantages (minimal but real) and the mentioned risks (mainly taxes).

There are many benefits to a holding company, but ask yourself whether these may be beneficial to you, depending on your objectives (and your legal status).

You should keep in mind that this is a business creation and hence the management of an additional structure. Therefore the profit from it should be able to cover the costs arising from the possible (recommended) recourse to the creation, management and advice of the holding company which will allow you to avoid losses.

questions to ask

Does the holding company protect my assets?

If your holding company is SAS or SARL, the liability is limited to the contributions of the partners. It is therefore a protective aspect of your personal assets in the event of bankruptcy. In practice, banks are required to have a personal guarantee, in this case, to negotiate the terms.

Should loans between subsidiaries be compulsorily subject to cash agreements?

Yes, and this is to avoid any risk of legal uncertainty (for example, allegations of illegal distribution of profits or misuse of corporate assets). Cash agreements must be carefully drawn up, such as service provision agreements.

Is the holding company primarily intended for large groups?

The holding company is no longer the prerogative of large companies or the industrial and commercial world alone. Having one partner may be sufficient to form a holding company and it may have several conditions. Holding companies are also increasing in the agriculture sector.

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