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Retail investors invest in their preferred companies by buying their equity stocks, preferred stocks, or corporate bonds in limited quantities. However, when you want to acquire companies, you will have to purchase a majority stake. The process is not different, only the quantity varies.
It is the reason behind the existence of the concept of a holding company. With its help, entities can manage small business divisions centrally effortlessly. It not only gives them better control of the company, it also ensures improved bifurcation and handling.
This article discusses the concept of a holding company and why it matters.
What is a holding company?
Also known as the parent company, a holding company is basically a regular company. So what makes it different? Unlike most other businesses, a holding company doesn’t usually manufacture, sell, or carry on business in any other form.
They either own the majority of voting rights or control the composition of the board of directors of the other companies (known as subsidiaries).
It means that they also own the assets and liabilities of the subsidiaries (to the extent of the equity holding percentage) but only have oversight capacities i.e.it does not manage the day-to-day operations of these companies.
A holding company can also own other types of assets such as property, patents, trademarks, bonds etc.
Why do holding companies exist?
The primary reason for the existence of a holding company is to manage the controlling equity share of its subsidiary companies. The secondary reason, which is not applicable for every such entity, is holding additional assets that have value.
A holding company can be structured in different legal forms, such as a trust, limited partnership, limited liability company, or foundation.
Types of holding companies
Even though there are several types of holding companies in existence, here are the most common types you are likely to come across –
- Pure – A company that solely owns a controlling interest in other companies and does not carry on any business operations
- Mixed – Such entities, apart from controlling subsidiaries, also carry on business operations.
- Immediate – A company that owns the controlling interest in another company and is also a subsidiary of another holding company
- Intermediate – A company that is a subsidiary of another holding company and also owns the controlling interest in another company of which the other company is an immediate holding company of its subsidiary
A holding company is a parent with the responsibility of oversight of the actions of the subsidiary. It also brings about a host of benefits for the group of companies, such as –
Risk management is one of the most significant challenges for every entity. If a business has multiple verticals or invests in diverse, high-risk assets, it is imperative to go the holding route.
It enables the business to bifurcate all the risky investments. So even if some parts perform poorly, it would allow the group to keep the others safe and ensure risk dilution.
A business house inadvertently owns a plethora of valuable assets ranging from plant and machinery and land to patents and cash. Having a single business that owns these and also runs its operations can be a risky affair.
A great way to preserve assets is to give them out on lease to the subsidiaries. It would allow business houses to safeguard their resources during harsh times.
The creation of a parent-subsidiary relationship is beneficial for the smooth functioning of business and enables taxation benefits for the companies in Singapore. The Singapore Government provides for favourable tax treatment and accounting for holding companies in the country.
Some of the other tax benefits which are notable include:
- Avoidance of double taxation: If a Singapore holding is a tax resident, it can enjoy the benefit of getting taxed twice (in the home country and Singapore) as the country signed the Avoidance of Double Tax Agreement with more than 70 countries.
- No capital gain tax: In Singapore, there shall be no transfer tax or capital gains tax involved upon the sales of shares. However, in the event of capital gains being the company’s income source or a short holding interval of a sold asset, they are considered as ordinary income and therefore subjected to taxation.
- Dividends are exempted from tax: Should there be any dividends from foreign subsidiaries, the holding company may enjoy corporate tax exemptions as long as they meet the conditions of “subject to tax” and “foreign headline tax rate”.
Safety from hostile competition
There can be times when your competition is on a hostile acquisition spree. They would therefore try their best to get rid of all their peers and ensure that they are the only dominant force in the market.
It becomes risky if you let a majority of your stock be vulnerable to such an unwanted rampage. Managing your business via a holding ensures that your competition remains at bay, irrespective of its power and financial capabilities.
These incentives are aimed to encourage multinational corporations to relocate their international or regional headquarters to Singapore.
Fosters creativity and innovation
If you are one entity, losses from a specific decision or endeavour can seep down and impact the entire business. It makes brands reluctant to invest in risky projects, especially when there is public money involved.
Remember, when Google unveiled Alphabet, it had disclosed the primary reason to be the inability to invest in innovative projects. The stakeholders were concerned about their investment is safe.
As a result, Google bifurcated the creative division from its core business and allowed the already-proven sectors to operate as usual.
The Singapore Government has several headquarter incentives, such as Pioneer Status Incentive and Development & Expansion Incentive available for specific holding companies.
Disadvantages of having a holding-subsidiary structure
Like every coin has two sides to it, having a holding-subsidiary relationship also has some drawbacks. Here are the issues that a business house in Singapore must keep in mind –
A single business entity doesn’t have layers of management and does not have multiple balance sheets that have to be tallied every few months. Add to that the unencumbered tax returns for them and having a holding instantly feels a burden. If it is a public entity, the challenges increase manifold.
Unlike a single-entity structure, it is far more complex to track the many subsidiaries under the holding company structure, especially for a publicly traded enterprise. This calls for a good entity management system that incurs additional cost just to keep track of important information, due dates, and records for all the subsidiaries.
Compliance costs can often take a toll on your finances
Every time you form a company, it entails formation costs in Singapore. So every time you divide your business into subsidiaries, you incur initial costs. However, these entities need to file their annual reports and have their tax obligations, too. It means you will have to bear these recurring costs for multiple companies instead of incurring it for one earlier.
Efficient management can be a challenge
If you own less than a 100% stake in your subsidiary, you will have to listen to other minority stakeholders and cater to their interests. It can feel cumbersome and impact the way business functions.
Another issue to be kept in mind is that if the holding management doesn’t have an expert pertaining to the subsidiaries’ business, the policymaking efficiency can be below-par and have a toll on the overall business performance.
How to create a holding-subsidiary structure in Singapore?
With so many structures available for a business, choosing the right kind of parent-subsidiary relationship can be challenging. If you are becoming a holding via a merger, there are far lesser considerations to make, and the process is a smooth one too.
If you are a new business, you can start with two entities – one holding and a subsidiary.
But if it is an existing business, the answer may not be as straightforward. There are multiple questions and answers you have to consider, which will shape the way your business moves forward.
Irrespective of whether you are new or an existing business, here are the questions that you need to answer before selecting the requisite holding-subsidiary structure in Singapore –
- What is the type of business entity you want to form?
- Where is the place of business for each such entity?
- What are the tax benefits and business grants available?
- What is the cost and tax benefit for setting up a new business entity vs changing the structure of an existing business entity?
Examples of top holding companies in Singapore
Even though there are several holding companies with a multitude of businesses across the world, Johnson & Johnson is the first that comes to our minds. It is one of the most respected blue-chip companies on the planet.
It has no business of its own other than having ownership stakes in over 250 businesses across industries. Their primary focus revolves around pharmaceuticals, medical devices, and consumer healthcare.
Here are several holding companies with one or more subsidiaries in Singapore –
- Alphabet (Google’s parent company)
- Goldman Sachs
- American Express
- Barclays Plc
- DBS Group
- Trafigura Group
The concept of a holding company is an interesting one. In most cases, you are unlikely to see them having any existence of their own other than in books. It means most of them to prefer not to carry on any business but manage a plethora of subsidiaries only.
Before you decide to undertake it for your business, it is imperative to understand that it is a complex process and requires a lot of paperwork.
Once you think it is feasible for your business, it entails several benefits and better control for managing all your business verticals efficiently.
Also, Singapore offers one of the better tax regimes to ensure that the process is intuitive and you will have no regulatory hindrances in carrying on your business with ease. It has a favourable tax structure and a forward-looking business environment to augment your productivity.
Also, read our article on SME Grants and Schemes in Singapore.