A holding company is a company that holds a financial interest in other companies (subsidiaries). Depending on its function, it can be passive or animating (we also speak of active holding). What are the main differences? What is the alternative of holding company according to your project?
Different Types of Holding Company: A Few Reminders
passive holding
A passive holding company (also known as a “net holding company”) is a company whose sole function is to hold financial interests in other companies. Hence its sole activity is to manage a portfolio of equity securities. It has a civil asset management objective. Thus its role is limited to shareholding.
Leading Holding (or Active Holding)
The leading holding company (we also talk about an active holding company) will also manage a portfolio of equity securities. But it will not be limited to this simple role of a partner or shareholder. It will participate in the management and exercise control of the subsidiaries. on these. It is a functional concept. It is the function of the holding company that makes it a facilitator. Tax administration will be based on physical elements to qualify the animation and apply taxes as a result of the system.
The “animator” side of the holding is performed and cannot be guessed. He proves himself.
The General Tax Code (Article 966) provides the definition of a leading holding company. The latter should actively participate in its group’s policy and control of subsidiaries, and provide internal services (administrative, accounting, legal, financial and real estate) where necessary.
The Council of State and the Court of Cassation provide additional elements that support the body of evidence that will determine merit.
According to the State Council (13/06/2018 n°395495), the leading holding company:
- Its core activity goes beyond the management of equity securities, actively participating in group policy and controlling subsidiaries;
- Provides exclusively in-house (administrative, accounting, legal, financial, etc.) services where appropriate.
For the Court of Cassation, this animation activity is considered “main” when the market value of the securities of the holding company’s subsidiaries represents more than half of its total assets (Cass. 14/10/2020 n° 18 -17.955 FS -PB).
And finally, be aware that the leading holding company is recognized on the condition that it effectively controls the subsidiaries, assuming the existence of a group of which it is a parent company; and that it concretely implements the means to animate its subsidiaries (their mere existence is insufficient) (Cass. com. 3-3-2021 n° 19-22.397 FS-PR).
Passive or Active Holding: What are the Key Differences?
Thinking of the main difference? There is a significant functional difference between the two types of holding companies and the tax implications on the qualifications of a “leading” holding company.
functional difference
The sole function of a passive holding company is to hold equity securities in its subsidiaries. This is its specific corporate objective. Therefore the passive holding company has no employees and does not participate in group management decisions.
In contrast, the purpose of a lead holding company is to control and run subsidiaries. It will therefore actively participate in the group’s policy, which will effectively provide services at the level of furniture and real estate along with support functions internally. The major holding company will generally hire salaried employees. It will fit in the management and direction of daughter companies.
Hence both differ in terms of their corporate objective and the effective method of management to be used.
differences on tax implications
If your holding company is a leader, you will be able to take advantage of tax benefits for which a passive holding company is not eligible.
Income Tax Deduction Mechanism on Share Capital Contribution
This system pertains only to contributions made to a major holding company (the latter must have formed and controlled a subsidiary for at least twelve months). Keep in mind that the inactive holding company may benefit from a reduction in contributions made. But subsequently the capital of eligible unlisted SMEs will be required to take cash subscription. which can be a hindrance.
Deduction of Value Added Tax (VAT)
If your holding company is the lead, it will be subject to services billed to daughter companies. This will allow you to deduct the VAT that is levied on your expenses. This would not be possible for a passive holding company which manages only a civil activity and is therefore not subject.
Deduction on capital gains from sale of securities
On allowance on capital gains from the sale of securities in the event of retirement, this benefit extends to leading holding companies only.
dutreil pact
The free application of a partial exemption from the transfer fee of the Dutreil Pact system (Article 787 BI CGI) is conditional on the quality of the holding company.
Real Estate Property Tax (IFI)
On tax on immovable property assets (formerly ISF), the qualification of the holding company would allow the manager to benefit from the exemption from IFI. Conversely, the passive holding company would not be able to profit from it because the real estate asset of the latter is not a professional asset.
How to choose the type of holding company for your project?
Are you hesitating to form a passive or a leading holding company? It will depend on its social purpose and therefore on your motivations.
Option to form a dormant holding company
If your objective is purely financial or, for example, your project is to create a family holding company (transfer of assets through donation or inheritance) or inheritance, it may be in your best interest to create a passive holding company.
Thus you will benefit from the benefits of the structure without the risks associated with the cumbersome management of the major holding company or the legal uncertainty around its qualifications (and which could lead to large tax adjustments in the event of subsequent disqualification).
The choice of a passive holding would also be relevant to a small composition, the animation lending itself more to a larger group. You certainly won’t benefit from all the tax benefits associated with an accredited holding company (particularly the deutrell-transmission system), but you will benefit from a powerful tool for managing your assets with an interesting leverage effect. It’s relatively simple to make and you’ll still have access to tax consolidation and parent-daughter governance.
Holding company election
Conversely, if you’re into a true entrepreneurial approach and want to take an active part in the lives of subsidiaries as a parent company, consider a leading holding company instead.
If you form a holding company to acquire or form a group of companies, for example, the major holding company will allow you to benefit from several leverage effects (financial, legal, tax and operational) and animate the group (part take) actively complying with its policy, controlling subsidiaries and providing services for them).
Keep in mind that for the Council of State, a holding company is above a leader if it leads a conglomerate, meaning your company’s size is criterion. The leading holding company lends itself less to smaller structures.
Of course, choosing a holding company (and making it essentially effective) gives you access to greater tax benefits (VAT deduction, Dutrell treaty, IFI exemption, reduction in income tax on contributions to corporate securities, reduction in capital gains in the event of retirement). provides. , e.t.c.).
But it is not without compensation, the hurdles are enormous, and setting up a holding company must be proven before the tax authorities.
This will generate management and advisory costs which can be significant. Here again, the size of the structure can affect the existence of the financial instruments needed to form and manage a holding company, so everything will depend on your situation.
questions to ask
How can I convincingly prove to administration that my holding company is a leader?
The tax administration will look for the facts. Do not economize on material resources (conclusion of the facility agreement between mother and daughter, regular development of facility reports, materialization and preservation of exchanges within summary reports).
Can I modify the corporate purpose of my holding company after the event?
How much does it cost to form a holding company?
It all depends on the chosen legal form, as well as the contribution to the share capital. To learn more, see our article on the cost of setting up a holding company.