A holding company is a company that does not have its own business operations. Instead, the holding company is used to own shares in other companies. The shares of stock that the holding company can own consist of publicly traded stock, LLCs, hedge funds, brand names, copyrights, patents, and more.
When a holding company owns over 50% of a company’s stock, that company is considered a subsidiary of the holding company. The holding company has direct control of the subsidiary’s business operations by way of majority shareholder voting. However, in some cases the holding company chooses to allow the subsidiary to function independent of the holding company.
Holding Company Tax Implications
Even though the parent company typically remains in control of its subsidiaries, the companies are considered legally separate. Because the companies are recognized as separate, each company pays its own taxes as it corresponds to their specific income. Regardless of this distinction, a holding company has the ability to take advantage of certain tax benefits that its structure allows for.
For example, utilizing a holding company structure can help you reduce and simplify your taxes. Simplification is achieved through the ability to consolidate filings, rather than file a return for each individual company. The possibility to reduce your taxes can occur when moving income to a lower tax jurisdiction through the process of income shifting.
Holding Company Strategies for Deferring Taxes
If you have a holding company, there are a number of strategies that you can implement to help you defer taxes. When you directly own shares in a company, any dividend payments from that corporation are subject to taxes on your personal tax return. However, through use of a personal holding company, you can set up the dividend payments from your shares to be paid to your holding company. In this case, those dividend payments are generally tax-free.
Here are some of the strategies that you can implement to defer taxes with your holding company:
Create Shareholder Holding Companies. One of the strategies you can implement to achieve greater flexibility is setting up a separate holding company for each of the shareholders in your corporation. This allows each holding company to direct the dividend payments to each of the shareholders. So, your company can pay dividends to the holding companies tax-free. Those holding companies can then pay dividends to their specific shareholder based on the individual’s personal needs. You may have an S-Corporation holding company.
Split the Income. Consider having additional members of your family share ownership of the holding company. By doing this you will be allowed to pay dividends to those family members (such as a spouse or anyone else in the family), which allows the dividend tax burden to be shared. However, keep in mind that it is not always advisable to issue shares to your children or other family members that are minors. If you are interested in this, consider utilizing a family trust.
Create a Trust. Another option is holding the shares of your company in a family trust, as dividends that are distributed to your holding company are generally tax-free. Any of the dividends paid by your company to the family trust will receive the same tax-free treatment achieved when the holding company directly owns shares of the company. Additionally, the members of your trust can include anyone in your family. This setup will allow you to distribute dividends as you see fit to the family members you have designated as beneficiaries.
Establish Protection from Creditors. Any profits from your company can be paid in the form of dividends to your holding company. Should your company require, the funds can always be paid back when cash is needed. Through this method, those profits are safe from creditors and will remain within your business.
Funds for Retirement. Holding companies allow you to accumulate assets over time that can be used as a form of pension or nest egg. When it comes time, these assets can be put to use in your retirement.
Can Holding Company Subsidiaries File Separate Tax Returns?
Generally, yes, subsidiary companies can file their own separate tax returns. However, there is the option for a holding company to consolidate business tax returns. Note, however, that if a holding company wishes to consolidate their tax returns, each subsidiary of the holding company must agree to it. Holding company tax procedures can get fairly intricate depending on its structure and subsidiary companies. While each subsidiary has the option to file taxes separately, holding companies generally have more to gain by consolidating their returns.