InsightsJune 26, 2020
The advantages of a holding company structure
When people talk about BVs (private limited companies) when, let’s say, having after work drinks, you will often hear the cliché: one BV is no BV. What does this mean? And does the cliché still apply?
What is a holding structure?
A holding company structure is nothing more than a BV (in this case the holding company) that holds the controlling shares in one or more other BVs (the operating companies or subsidiaries). In this case, the entrepreneur is a shareholder of the holding company.
Why opt for a holding company structure?
When your company grows and makes good profit, this may attract buyers that make an offer to buy your organisation. If you only have a BV instead of a holding company structure, you pay income tax on the profit you make with the sale, since you’re the shareholder. You pay a direct 26.25% on your profit.
If you sell shares you hold through a holding company, you can sell them without having to pay tax. This scheme is called the participation exemption. The profit you make on the sale goes into the holding company without you immediately having to pay tax on it.
Only when you transfer the money from the holding company to your personal bank account do you have to pay 26.25% tax. As long as you don’t do this, you can use the gross amount in your holding to invest, for example.
Spreading risk assets
If you run an operating company that holds certain risks, it’s wise to hold the shares of the operating company through a holding company. There are several reasons to do so:
- The capital you’ve gained through the operating company can be transferred tax-free (using the participation exemption) to the holding company as a dividend payment. In general, this capital is now safe in the event of a possible bankruptcy of the operating company. Of course, there are exceptions to this, for example in case of directors' liability.
- When placing assets under the holding company, we’re not just talking about profit from the operating company. You immediately put certain assets you don’t want to fall under the risk of the operating company into the holding, e.g. intellectual property or real estate.
Corporate income tax benefit
A BV has to pay corporate income tax on the profits the company makes. The corporate income tax has two rates. On the first €200,000 of the profit, a rate of 16.5% is applicable. Anything over €200,000 is taxed at 25%. This is something you want to avoid of course! It’s therefore important that the taxable profit per BV doesn’t exceed €200,000.
This can be done by sending invoices from the holding to the subsidiary and thus creating a situation in which the profit is shared between the two BVs. Of course, invoices sent from the holding company to the operating company do need a reasonable ground. You can’t just randomly send invoices.
Several reasons why a holding company would send an invoice to the operating company are:
- Management invoice: The shareholder, or director and major shareholder (DGA), works for the BVs. It’s common for a DGA to be employed by the holding company. The holding company then leases the services of the DGA to the operating company. The holding company sends invoices for these services to the operating company.
- Real estate rental: As stated before, from a risk management point of view it’s advisable to hold real estate in the holding company instead of the operating company (larger holding company structures often even set up a special BV for real estate). This also has its advantages regarding the corporate income tax rate. Because the holding company can rent out property to the operating company, an invoice can be sent for this. This results in a lower profit in the operating company and a higher profit in the holding company.
- Intellectual Property (IP): Particularly in the field of software development, it’s very common to place intellectual property in a holding company. The operating company can sell a software product through a license obtained from the holding company. The holding company then sends an invoice for this to the operating company in order to achieve the desired goal.
A BV often has multiple shareholders. These shareholders often have slightly different personal interests, or they make different choices as entrepreneurs. To ensure that this doesn’t affect the activities of the company, it’s recommended that the various shareholders hold the shares through a holding company.
The holding companies send a management fee to the related subsidiary for the services provided by their shareholders. Once this fee has been received by the holding companies, the various shareholders can make personal choices without this affecting the other shareholders.
Examples of choices that would fit better in a holding company than in an operating company are:
- Company car: Some shareholders may want to drive more expensive cars than other shareholders.
- Annuity: Since choices regarding pension savings are very personal, it’s logical to place these in the holding company.
- Granting mortgages: In one of our previous articles we explained that it can be interesting to provide a mortgage from the BV to yourself. It’s also better to do so from your personal holding company, than from an operating company that has another shareholder.
From all of what’s mentioned above it would appear that in many cases it’s still preferable to have a holding structure instead of one BV. Of course, having just one BV will result in less costs. And in some cases this is absolutely fine, especially when you’re running a business in which you are the sole shareholder and the company is not easily marketable.
For example, self-employed professions that often generate higher incomes such as IT developers, consultants, lawyers, etcetera.