Imagine that you and your business partners are about to launch a new venture. You are ready to incorporate a company and begin trading. However, if there is a possibility that you might sell the company in the future and wish to maximise your returns, there is a strategic move that could make a significant difference in terms of taxation: the creation of a holding company from the outset.
What is a Holding Company and Why Should You Consider It?
A holding company is essentially a company whose primary purpose is to own shares in other companies. While the concept may sound complex, the benefit is straightforward: it allows for a substantial exemption in taxation upon the sale of a business.
The Key Advantage: 95% Exemption from Corporation Tax
If you and your partners hold shares in the operating company directly and later sell it, each of you will be liable to pay tax on the capital gains through your personal income tax (at rates ranging from 19% to 30%, depending on the gain). However, if the holding company owns the operating business and is the company that sells it, it will enjoy a 95% exemption on the capital gain for Corporation Tax purposes. This means that only 5% of the gain is taxable.
A Practical Example: How Much Could You Save?
Let us assume that in 2025 you and a business partner incorporate a company, contributing a total of 300,000€ (i.e. 150,000€ each). Over time, the business thrives and a buyer offers 2€ million for the company. Now consider two scenarios:
- Without a holding company: you sell your shares as individuals and pay income tax on the capital gains. The tax payable is 236,880€ each (total of 473,760€).
- With a holding company: the sale is made by the holding company, which is taxed on only 5% of the gain. The total tax payable is 21,250€.
The difference in tax liability between these two scenarios could easily amount to hundreds of thousands of euros. A considerable saving, indeed.
Planning to Reinvest the Profits?
Another benefit of using a holding company arises if your objective is to continue investing. By channelling the proceeds of the sale through the holding company, you can reinvest in new ventures without triggering personal income tax obligations.
However, if the intention is to distribute all profits directly to shareholders, the holding structure may be less advantageous. In this case, the holding company would first pay Corporation Tax on 5% of the gain, and then shareholders would pay personal income tax on any dividends received. A simpler structure might be more suitable in such circumstances.
How Should It Be Structured?
To ensure the benefits of the holding structure and to avoid challenges from the tax authorities, it is crucial that the structure be established from the outset:
• First, the partners incorporate the holding company.
• Then, the holding company forms the operating company.
Although it is legally possible to establish the operating company first and later contribute the shares to a newly formed holding company, this approach carries risks. While such a transfer can potentially benefit from a tax-neutral regime, the tax authorities may inspect the transaction. If the holding company sells the operating company shortly after acquiring it, there is a risk that the authorities may consider the arrangement a sham designed for tax avoidance. In such cases, the gains could be reattributed to the individual shareholders as if the holding company did not exist.
In Summary
Establishing a holding company from the beginning may be a highly effective strategy if:
• You intend to sell the operating company in the future.
• You wish to reinvest the profits in other ventures.
However, if your sole aim is to distribute all earnings to shareholders, a more straightforward structure may result in a lower overall tax burden.
