A holding company owns part, all, or a majority of another company's outstanding stock. They normally do not produce goods or services themselves and their primary function is to own the shares of other companies.
This type of company reduces the tax and business risks for the owners and makes computation of actual income that much more flexible for tax purposes. An offshore company makes even easier to save tax and allows for the possibility of it owning several operating companies in different parts of the world. Rules governing tax free dividend vary by country and type of company, and also depends on double taxation treaties.
Sometimes the name of the company itself includes "holdings", signifying that it is a pure holding company and does not do any operations.
In the United States, Berkshire Hathaway is one of the largest publicly traded parent companies; it owns numerous insurance companies, manufacturing businesses, retailers, and other companies. Two other large notable parent companies are UAL Corporation and AMR Corporation, whose primary purposes are to wholly own United Airlines and American Airlines, respectively.
Advantages of Parent companies
The greatest advantage is the flexibility to buy or sell businesses without disrupting it's operations. The holding company structure ensures that the legal business name, any licenses or grants obtained by it in the past, any brands owned by it, any tax credits or other liabilities incurred by the business remain with the subsidiary company and does not involve the parent holding company.
For example, in U.S. broadcasting, many major media conglomerates have purchased smaller broadcasters outright, but have not changed the broadcasting licenses to reflect this, resulting in stations that are still licensed to the earlier licensees.
Personal holding company
In the United States, a personal holding company is defined in section 542 of the Internal Revenue Code. A corporation is a personal holding company if both of the following requirements are met:
* Personal Holding Company Income Test.
At least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties.
* Stock Ownership Requirement.
At any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is owned, directly or indirectly, by five or fewer individuals.
Parent or holding company
A parent company is a holding company that owns enough voting stock in another firm (subsidiary) to control management and operations by influencing or electing its board of directors. A parent company could simply be a company that wholly owns another company.
A good example is Warren Buffett's Berkshire Hathaway (NYSE: BRK.A), which owns GEICO, See's Candies, Executive Jet, Dairy Queen, The Pampered Chef, and Benjamin Moore paints, among many other businesses.
While many companies routinely gobble up other companies, they frequently aim to blend these acquisitions into their operations. Parent companies keep the businesses they buy more separate.
Another major advantage is when legislation forces companies to remain separate because of anti monopoly laws. e.g the financial. insurance or broadcasting sectors in most countries. Here it is sometimes better to keep the different business arms at a distance via a holding company and to make the desired acquisitions when the legislative opportunities arrive.
With a holding company structure, the management and the shareholders also have greater flexibility in raising funds both in terms of equity or debt. The holding company can be listed or the operating company can be listed in the local stock markets or in global ones. Similarly debt can be raised where it is needed so that the lenders are more comfortable with risk assessment.
A registration offshore company which acts as a parent company is becoming more popular because of the added flexibility in tax computation.