UAE is the hub of investment and innovation, home to powerful entities like Abu Dhabi Developmental Holding Company, an International Company. Exploring the benefits of holding a company could be a game changer. Let’s dive in and discover what are the benefits of a holding company:
What is a Holding Company?
A holding company or a Holdco, is an independent business entity established to own and control other companies. It is the opposite of a trading company, which actively produces goods and services. Also, a holding company doesn’t manage day-to-day operations but serves the role of managing its subsidiaries effectively.
Moreover, the purpose of having a holding company is to reduce risk, tax advantages, asset protection, limit liabilities, and raise capital without even looking at day-to-day operations.
Core Benefits of a Holding Company
Understanding the basic concepts is important. The following are the benefits of a holding company that will help you decide whether establishing one is the right move for you:
Risk Management and Asset Protection
The first and foremost benefit of a holding company is the protection of valuable assets like trademarks, copyrights, intellectual property, real estate, and many more. By using a holding company, you separate these assets from subsidiaries, which reduces the risk that those assets face.
The independent subsidiaries operate on their own without interference from the parent companies. In this way, the investor protects its assets through the holding company. Moreover, this strategy also facilitates its limited liability.
It means if one subsidiary incurs a loss or goes bankrupt, the bank lender or creditor can’t access your assets, held by a parent or overall organization. Thus, the holding company protects the overall wealth of controlled companies.
Tax Efficiency
One of the most prominent advantages of a holding company is the potential tax planning for various investors and entrepreneurs to maximize profitability and raise capital.
Profit shifting is a tax strategy, used by huge investment corporations to shift their profits from high-tax jurisdictions to low-tax authorities. It could be easier to consider this approach with an example. Let’s suppose you are generating a huge profit on a 30% higher tax in your country.
So you send that profit to the area and charge low tax on goods and services. In this way, the tax burden gets reduced and you can earn more.
Transfer pricing refers to the prices assigned to goods and services exchanged between related entities. It involves transactions where goods and services are sold in jurisdictions with high rates. This strategy aims to shift profits to jurisdictions with lower tax rates. The goods and services are often priced higher than their market value in the lower tax jurisdiction. This approach reduces the tax load and earns more, minimizing the tax liabilities.
Substantial Shareholding Tax Exemptions
Substantial shareholding exemptions (SSEs) refer to the tax relief that allows shareholders to sell or transfer their shares without incurring capital gain tax. These are designed to encourage the investors’ economic growth without struggling with tax liabilities.
Imagine you buy 15% of a company for $50,000* (AED 183650*). After a few years, you sell those shares for $10,000 (AED 36730*) making a profit for $5,000 (AED 18365*). Without SSE, you pay tax on a $5,000* (AED 18365*) profit. If you qualify for SSE, you will not have to pay any tax, hence keeping you more money.
Diversification
Owning and controlling other operating companies through a holding company provides significant diversification opportunities. It broadens assets’ income, based on the industry, geographic regions, and product lines lowering the risks associated with relying on one business or market.
This diversification broadens various streams of income-creating opportunities for the shareholders. Moreover, it helps the investors to increase their portfolios, reduce risk, and share resources in sister subsidiaries that nurture growth.
Flexibility and Control
Holding companies allow the parent to control the subsidiary’s management according to the market preferences. It has the flexibility to distribute its capital and other resources across its subsidiaries as needed to enhance efficiency.
For example, if one subsidiary needs additional investment to expand, the holding company can reallocate resources from a more profitable subsidiary. Additionally, it can provide essential services such as administrative services or human resources to its subsidiaries, thereby improving operational efficiency.
Succession Planning
Another benefit of setting up a holding company is its role in succession planning. Holding companies offer long-term solutions for business continuity. In the event of the shareholder’s death, the assets and profits can be passed on to the family members without disrupting the business operations. This provides stability and ensures sustainable growth over time.
How to Set Up a Holding Company in the UAE?
- Choose the Company Structure (Mainland Holding Company or a Free Zone)
Mainland companies are registered under the Ministry of Economics while the free zone companies are established in specific economic zones
- Select the Jurisdictions
For mainland companies, choose an emirate, e.g., Abu Dhabi, Dubai, whereas for free zone companies, select a specific free zone, e.g., JAFZA, ADGM)
- Select a Unique Name that Aligns with UAE Naming Guidelines
Prepare documents (business registration form, owns /partner IDs and valid UAE residence permits
- Obtain Initial approval (for mainland companies, get initial approval from the Department of Economic Development. For free zones, seek approval from the relevant free zone authority)
- Submit the required documents and pay the applicable fees to obtain your company license.
- Open a corporate bank account.
- Register with UAE authorities to ensure compliance with local regulations
- Develop strategies for subsidiary management
Difference between Holding and Parent Company
A holding company is a large corporation that oversees the parent companies or subsidiaries on a bigger picture, takes the major decisions, and ensures that companies align with their huge goals.
On the other hand, the parent companies directly interact with the subsidiaries. However, they work independently to propel development.
The major that they opt for is their functions, holding companies control the investment of other companies while the parent company directly operates to maximize the profit with different strategic planning.
Difference between Subsidiary and Sister Companies
A subsidiary company is an independent legal entity controlled by a parent or holding company. The parent company owns a majority of its shares to hold a subsidiary. The two independent subsidiaries operate under the same Holdco known as sister companies.
They are fellow companies and share resources, although they have independent strategic planning. A well-known example is Coca-Cola and Diet Coke which work under the same umbrella.
Conclusion
To conclude, holding companies offer significant advantages such as risk reduction and asset protection for tax efficiency and diversification. Whether you’re looking to manage assets, expand through subsidiaries, and plan for future succession. A holding company can be an invaluable part of your strategic planning.
Setting Up a Holding Company with Expert Assistance from Xpert Advisory
If you want to set up a holding company in the UAE, Xpert Advisory can make it happen with ease. Without requiring your physical presence, we ensure efficient tax procedures and company formation.
Our expert consultants provide tailored advice to align with your goals as a business owner. Xpert Advisory tackles every challenge, making the process smooth and hassle-free. So, what are you waiting for? Contact us to get started.
FAQs:
What is a mixed holding company?
A mixed holding company refers to a holding company that provides dual services e.g., investment services and operational services like IT services or financial services. This helps them to earn more.
What are several advantages of holding a company?
Risk management, asset protection, reduction of tax charges, diversification in the portfolio of the holding company, more flexibility, or succession planning.
What is the main purpose of a holding company?
The purpose of a holding company is to protect and purchase the assets of multiple businesses.
What are the types of holding companies?
Pure, mixed, immediate, and intermediate are the types of holding companies.
What is a limited liability company?
LLC is a type of business structure that combines the liability protection of a corporation with the flexibility and tax benefits of a partnership.
