Many business owners seek to establish holding companies due to their pivotal role in organizing economic activities and expanding investment opportunities. Thanks to their legal and financial structure, holding companies provide the opportunity to efficiently manage a group of subsidiaries.
Establishing a holding company is not merely about creating a new economic entity; it is a long-term strategy aimed at enhancing control over other companies and ensuring the achievement of the group’s shared objectives. In this article, we review how to establish a holding company, highlighting the necessary steps for its formation, as well as the advantages that encourage taking this step.
What is a Holding Company?
A holding company is a large entity established to own and manage controlling stakes in other companies, known as subsidiaries. The holding company serves as an investment and management tool and does not directly produce goods or provide services. Instead, it is a legal entity that holds assets on behalf of another entity. Typically, a holding company is used to retain ownership rights in subsidiaries or other entities.
What are the Requirements for Establishing a Holding Company?
Establishing a holding company requires adherence to a set of legal and administrative requirements and procedures. Below are the key points to consider when setting up a holding company:
Complexity of Establishment and Maintenance
Creating and managing holding companies involves a high level of paperwork and record-keeping compared to other types of companies. This includes drafting the holding company’s formation agreement, preparing contracts, maintaining financial reports, and complying with legal requirements. As a result, maintaining a holding company is more costly and time-consuming.
Compliance with Additional Regulations
Holding companies are subject to local and federal laws and regulations, which may impose additional obligations, increasing costs and complicating business operations. Therefore, compliance with these laws is crucial to avoid legal issues.
Managing Conflicts of Interest
If a holding company owns shares in multiple companies operating in the same sector or directly competing with each other, potential conflicts of interest may arise. For example, one subsidiary may be given an unfair advantage over another, leading to significant managerial and ethical challenges.
Compliance with State Laws
The holding company must comply with the laws and regulations of the state in which it is established. This includes selecting an appropriate legal structure, such as a Limited Liability Company (LLC) or a Corporation, while considering the laws governing each type.
Asset Protection
A holding company can play a key role in protecting its assets and those of its subsidiaries. However, to ensure this, operations must be managed properly to safeguard assets from financial or legal risks that a subsidiary may face.
Risk Mitigation During Establishment
One way a holding company can support new businesses is by purchasing their assets and leasing them back. This helps the new company save on costs associated with setting up operations and allows it to use funds to repay loans to the holding company.
Financial and Advisory Planning
When reviewing a model for a holding company’s formation agreement, it is important to work with a professional and experienced financial advisor to ensure full compliance with legal and financial requirements. This helps establish a robust legal structure and understand all the implications and effects of setting up a holding company.
Why Establish a Holding Company?
Holding companies offer various benefits, making them effective for asset management and business organization. Understanding how does a holding company make money is crucial, it earns dividends from subsidiaries, charges fees for management services, and profits from asset sales or investments. Below are the key benefits of establishing a company .
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Tax Exemptions for Multiple Companies
Assets can be transferred between subsidiaries without incurring taxes, facilitating resource management and enhancing tax efficiency. Holding companies can use losses from one subsidiary to reduce the tax liability of other profitable subsidiaries, enabling faster tax exemptions and increasing the group’s overall profits.
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Inheritance Tax Exemptions
Typically, investment companies are not eligible for inheritance tax exemptions. However, if an investment company is part of a group that includes commercial activities, the entire group’s value may be exempt from inheritance tax, reducing the tax burden on heirs.
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Sharing Administrative Costs
Subsidiaries can share centralized administrative services and functions, such as accounting, human resources, and legal services. The costs of these services are distributed equitably among the subsidiaries, reducing operational expenses for each company.
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Asset Protection
Holding companies protect valuable assets from commercial or legal risks that a subsidiary may face. Operating as a separate entity, the holding company holds assets, isolating them from the financial and legal liabilities of its subsidiaries.
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Mitigating Financial Risks
If a subsidiary faces financial difficulties, the holding company’s structure ensures that the group’s other assets remain protected and unexposed to risk. The holding company can intervene to support subsidiaries or restructure assets to achieve financial stability.
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Forming a Group of Companies
The primary purpose of a holding company is to create a group of subsidiaries, enabling centralized control and management. This structure facilitates strategic planning and expansion into new markets while maintaining the operational independence of each subsidiary.
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Tax Efficiency
A holding company provides tax advantages by consolidating income and tax losses across subsidiaries, potentially reducing total taxes owed. It may also benefit from tax incentives or preferential tax treatment in certain jurisdictions. If the holding company owns 100% of its subsidiaries, they may be considered disregarded entities for tax purposes, allowing for a unified tax return under laws such as the “Little John” law.
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Operational Efficiency
Holding companies consolidate administrative functions, such as accounting, human resources, and legal services, saving costs and improving operations. For example, a holding company can employ a single chief financial officer to manage the financial affairs of multiple subsidiaries, allowing for the hiring of a highly skilled employee at a higher salary while achieving overall cost savings.
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Access to Capital
Holding companies have greater access to capital due to their diversified assets and reduced risks. This enables them to easily raise funds for investments, acquisitions, or expansions. For instance, a holding company can secure a shared line of credit with better terms compared to individual subsidiaries attempting to obtain separate credit lines.
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Shared Resources and Expertise
Holding companies can share resources such as technology, industry expertise, or marketing strategies among subsidiaries. For example, if one subsidiary develops a successful marketing strategy, it can be shared with other subsidiaries to improve overall performance.
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Effective Governance
The holding company structure allows for the formation of a centralized board of directors or the appointment of advisors to support the holding company as a whole, benefiting all subsidiaries. This enhances oversight, strategic planning, and decision-making.
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Exit Strategy
The holding company structure provides flexibility for business owners when planning an exit strategy. A specific subsidiary or the entire holding company can be sold, depending on the objectives. For example, if one subsidiary operates in manufacturing and another in services, separating them facilitates the sale process and increases the chances of finding suitable buyers for each entity.
In summary, establishing a holding company allows business owners and investors to benefit from legal protection, tax efficiency, administrative integration, and the ability to achieve long-term strategic goals.
Disadvantages of Holding Companies
Despite the numerous benefits of holding companies, they inevitably come with certain drawbacks that must be carefully considered before establishment. The most prominent disadvantages include:
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High Operational Costs
Establishing a holding company or any of its subsidiaries requires paying setup fees, which can be high in some states or countries. If the holding company does not engage in revenue-generating commercial activities, it may incur additional costs, including:
- Human resources management fees.
- Legal and consulting service fees.
These costs can increase the financial burden on the holding company, especially in the early stages of establishment.
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Complex Organizational Structure
The structure of holding companies is complex due to multiple levels of management and ownership. Managing operations between the holding company and its subsidiaries may require significant coordination and communication efforts. This complexity can lead to difficulties in decision-making, particularly if the subsidiaries operate in different sectors or markets.
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Conflicts of Interest
If the holding company does not own 100% of a subsidiary, conflicts of interest may arise between the holding company and minority shareholders. These conflicts can occur in areas such as profit distribution, expansion decisions, or business strategies, potentially leading to internal disputes that affect the subsidiary’s performance.
Objectives of Establishing a Holding Company
There are several objectives behind establishing a holding company, which include:
- Investing in stocks and other securities to generate financial returns.
- Owning real estate and movable assets necessary for conducting various activities.
- Providing loans, guarantees, and financing to subsidiaries to support their operations.
- Owning intellectual and industrial property rights, including patents, trademarks, industrial designs, and franchise rights.
- Engaging in various economic activities consistent with the company’s objectives.
- Achieving control over other companies by owning their shares, either directly or indirectly.
- Controlling the formation of boards of directors or management boards of subsidiaries to enhance effective management.
Steps to Establish a Holding Company
A holding company can be established in accordance with the new companies’ law by following these steps:
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Choosing the Type of Holding Company
- The holding company can be established as a limited liability company (LLC) or a joint-stock company.
- The word “holding” must be added to the company’s trade name to clarify its nature and activities.
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Creating the Holding Company
- The holding company is formed by individuals or existing companies.
- Shares of a joint-stock company are purchased or sold such that the holding company owns more than 50% of the subsidiary’s capital.
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Preparing the Holding Company’s Articles of Association
- The articles of association must be written in Arabic in accordance with Article 7 of the new companies’ law to avoid invalidation.
- The articles of association should include the following information:
- Company’s name (indicating it is a holding company).
- Primary purpose of establishing the holding company.
- Company’s main location.
- Number of shares, their types, nominal value, and associated rights for each category.
- Company’s duration.
- Management details including the number of board members and their appointment mechanism.
- Start and end of the financial year.
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Submitting Required Formation Documents
When submitting the registration application to the competent authority, the following documents must be attached:
- Names, addresses, and nationalities of the founders.
- Report on expenses related to the company’s establishment.
- Declaration by the founders confirming full subscription to the company’s shares and the value of paid-up shares.
- Certificate of deposit for the issued capital at an accredited bank.
- Declaration by the founders appointing the first board of directors with their names and nationalities.
- Appointment of the company’s first auditor if not specified in the articles of association.
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Obtaining Necessary Licenses
- Submit all documents to the Ministry of Commerce or the relevant authority to obtain official approvals.
- Pay the prescribed fees for registering the holding company.
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Completing Registration Procedures
- Upon approval, the holding company is registered in the commercial registry of the jurisdiction where it is located.
- A commercial registry is issued, allowing the company to conduct its holding activities.
Conditions for Forming a Holding Company
If you wish to establish a holding company, you should be aware of the following conditions that must be met:
The Company Must Be Commercial
A holding company is not a new type of company, whether it is a partnership or a capital-based company. It is fundamentally a commercial company, like others, with an independent legal personality and the legal capacity to own assets. Consequently, it can assume the status of a holding company.
Necessity of Having a Subsidiary
A company cannot be considered a holding company unless it owns the majority of shares or stakes in other companies, granting it the ability to control and direct their activities. These companies, which are subject to the control of the holding company, are referred to as subsidiaries.
Actual Control of the Holding Company over the Subsidiary
The role of the holding company is not limited to investing its funds in subsidiaries; it must exercise real control over their decisions. This includes determining financial and investment policies, setting production plans, and identifying suitable export markets. It is worth noting that the nature of the subsidiary’s activities, whether civil or commercial, does not affect this control.
Independence of the Subsidiary from the Holding Company
The subsidiary must have complete legal and operational independence from the holding company. This distinguishes a subsidiary from branches or agencies, which do not possess an independent legal or corporate personality. The subsidiary’s independence is evident in several aspects, such as having its own name, distinct nationality, and a separate main headquarters.
Types of Holding Companies
Holding companies are classified into several types based on their legal structure and the nature of their activities. Here are the main types:
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Limited Liability Company (LLC)
A common type of holding company that provides legal protection for investors by separating assets and liabilities between the parent company and its subsidiaries. Shareholders in this type of company have limited liability for the company’s debts, reducing personal risks.
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Private Joint Stock Company
A holding company whose shares are traded privately within a limited group of shareholders and cannot be offered to the public. This specific type requires the formation of a board of directors and strict compliance with local laws regarding the specified capital.
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Public Joint Stock Company
A holding company whose shares are traded on public financial markets. This type requires adherence to higher regulatory and transparency standards, allowing it to attract significant investments from the public.
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Subsidiary Company
A company wholly owned by a holding company. The parent company has full ownership of the subsidiary, enabling centralized management and strategic direction for growth.
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Free Zone LLC
This type of company is established in free zones, benefiting from tax advantages and flexible procedures. These companies offer a flexible business environment, along with tax exemptions and customs facilities.
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Special Purpose Holding Company
These companies are created for specific purposes, such as managing particular investments or executing acquisitions. They feature a flexible structure that allows focus on a specific sector or activity.
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Immediate Holding Company
This is a company that directly owns the majority of a subsidiary’s shares or stakes without intermediaries, enabling full control over the subsidiary’s decisions and strategic direction.
Each type offers unique advantages based on investment needs and strategic objectives. It is essential to consult a local legal advisor at Alpha Company to determine the most suitable option that aligns with business requirements and investment goals.
The Difference Between a Holding Company and a Subsidiary
There are fundamental differences between holding companies and subsidiaries, which are outlined below:
A holding company is a commercial entity, not a new type of partnership or capital-based company. It is a standard company with an independent legal personality and the capacity to own assets. Its primary function is to own the majority of the capital of subsidiaries to control and direct their activities.
A holding company does more than invest in subsidiaries, it controls operations by setting financial policies, production plans, and export strategies. While it doesn’t produce goods or services, subsidiaries handle these tasks based on their activities. This structure streamlines management and enhances efficiency across the corporate group.
The new companies’ law allows holding companies to engage in economic activities, improving the business environment. Control is established when a holding company owns 51% or more of a subsidiary’s shares, granting financial and administrative authority over decisions while making it responsible for the subsidiary’s debts and obligations.
A subsidiary is formed by a holding company’s board but maintains legal and corporate independence, including financial liability, nationality, headquarters, and name. Despite this, it remains dependent on the holding company, either through majority ownership or asset contributions, allowing direct intervention in management while preserving operational autonomy.
The structure that integrates the holding company and its subsidiaries contributes to the widespread adoption of this type of company due to the significant financial benefits achieved by consolidating projects under a single entity’s control.
Costs of Establishing a Holding Company
To establish a holding company, you must account for various fees and costs, including registration, legal, and ongoing compliance expenses.
Company Registration Fees
These fees are associated with registering the company with the Department of Economic Development or the relevant authority in a free zone, and may include costs for submitting the application and processing procedures.
Commercial License Fees
The holding company must obtain a commercial license to legally conduct its activities, which includes costs related to issuing and renewing the license.
Legal Consultation Fees
You may need to consult a lawyer or legal advisor for guidance on the company’s legal structure and preparation of necessary documents.
Bank Account Opening Fees
These fees relate to opening a bank account in the name of the holding company, including costs for account verification and management.
Office Rental Fees
If a physical office is required to manage the company, costs for rent and associated utilities must be covered.
Formation and Legal Procedure Fees
These include costs related to preparing the holding company incorporation contract, notarizing documents, and registering trademarks if necessary.
Capital Costs
Some legal systems may require providing initial capital when establishing the holding company.
Employment and Visa Fees
If hiring employees is necessary, costs for work visas and residence permits will apply.
Insurance Fees
The holding company may require various types of insurance, such as property insurance or liability insurance.
It is important to collaborate with a local consultant or a specialized consulting firm, such as Alpha Company, to obtain accurate estimates of these fees and requirements.
Overview of Alpha Company
Alpha Company can assist you to establish a holding company by providing a sample holding company incorporation contract and streamlining the process of obtaining all necessary documents and paperwork, guiding you step-by-step until the company is launched and operational. They pave the way for your entrepreneurial journey with over 26 years of experience in the United Arab Emirates, making Alpha your trusted partner for completing transactions in Abu Dhabi.
Contact Information
- Email: info@alphabudhabi.com
- Phone: 00971561691648
- Address: Abu Dhabi – Mussafah Industrial Area – M44 – Sheikh Sultan Bin Zayed Building
Conclusion
Establishing a holding company is a strategic choice for investors managing multiple businesses. It fosters growth, innovation, and tax advantages. Proper planning enhances asset management with flexibility and efficiency. Adhering to procedures and consulting experts ensures success. With a clear vision, those looking to grow can confidently establish a holding company as a foundation for sustainable expansion in global markets.
Frequently Asked Questions
What activities can a holding company undertake?
Managing subsidiaries, investing in stocks, providing financing, and owning intellectual property rights.
Can a holding company be established in free zones?
Yes, free zones offer advantages such as tax exemptions and simplified establishment procedures.
Does a holding company provide tax benefits?
Yes, in some countries or free zones, holding companies can benefit from tax exemptions or reductions.
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