MSC Research
Holding Company in Action
What Is a Holding Company?
A holding company is a limited company that primarily holds shares of other companies where its key source of income is dividends, rather than having its own active operation.
A holding company can be used for various purposes, as follows.
Tax Advantages
Exemption on Corporate Income Tax on Dividends
A holding company that (a) holds at least 25% of voting rights of the dividend-paying company(ies)’s shares and (b) holds such shares for at least 3 months before and after the receipt of dividend (accrual basis) will be exempted from the 10% withholding tax that would otherwise be withheld at source by the dividend-paying company. The amount of dividends received will not be included in the company’s revenue for the purpose of corporate income tax computation.
Remarks:
- If the 25% of shares held have less than 25% of the total voting rights of the dividend-paying company, the corporate income tax on dividends will not be exempted. Example is when a holding company holds preference shares with less voting rights than those of ordinary shareholders’[1].
- If the holding company is a listed company, only the condition of ‘holding of shares for at least 3 months before and after the receipt of dividend (accrual basis)’ is required to be met. The percentage of shares held is irrelevant in the case where a listed company receives dividends.
Exemption of Specific Business Tax on Interest from Loan
Interest of a loan between associated companies is exempted from 3% specific business tax, aka SBT (plus the local tax of 10% of the amount of SBT) (on gross receipt, i.e. interest)[2].
Associated companies mean two or more companies that are related by way of at least 25% holding of shares (voting rights) for at least 6 months prior to the making of loan.
Remark: Only the SBT is exempted for associated companies. The stamp duty on a loan agreement and the corporate income tax on the revenue (interest) still apply.
Anti-Takeover Tool
A holding company can act as a block shareholder that holds a significant percentage of the target’s shares, as opposed to having dispersed ownership of shares held directly be many shareholders (e.g. family members) at the target’s level. This can reserve the holding company’s right to sell the shares. A decision to sell shares of the target will be made at the level of the holding company, whether it requires board or shareholders’ approvals depending on the constitution made between family members (shareholders of the holding company) or the shareholders’ agreement made between them.
This may be even more important for listed companies where prices of shares majorly depend on market’s sentiment at a particular time, where this can be through no fault of the company’s performance. A drop in stock price will result in the company being an easy target for takeover. A buyer may keep purchasing the company’s stocks when there’s a drop in price until they finally hold a significant number of stocks as desired. Example of this is when LVMH stocks were continually purchased by Bernard Arnault.
Remark: As opposed to being an anti-takeover tool, if the owners agree to the takeover, a holding company will be an influential shareholder, according to the percentage of shares it holds in the target, to negotiate terms of the takeover, to the degree allowed by the applicable laws.
Family’s Wealth Management
A family holding company can enjoy the exemption of 10% tax on dividends if all conditions are met (as previously mentioned). Moreover, each family member usually holds shares in a listed company directly in order to enjoy the personal income tax exemption on capital gains when shares are traded on the stock exchange. The capital gains received by the holding company (or any kind of company), however, will not be exempted from corporate income tax.
A family holding company is usually used as a mechanism to transfer wealth to the family’s next generation by having those family members hold stake in the family holding company, where control and management is centralized.
Business Diversification
A company is free to engage in any kind of business operations. Some businesses, however, are restricted for various purposes, e.g. businesses that involve the public as a whole or their finances such as a securities company regulated by The SEC or a commercial bank regulated by the Bank of Thailand, which are licensed businesses.
Licensed businesses are heavily regulated, while business diversification under the same entity may pose a risk to the existing ones. Also, businesses with different risk profiles are usually advised to be run by separate entities to avoid one being a financial drain to the other or for better resource management.
A holding company can come into play by being an entity that ultimately holds stakes in each of the business of the whole group, i.e. the existing businesses as well as the business diversified. This will make it possible for the owners (through a holding company) to diversify their business through their subsidiaries or associated companies, without its existing businesses being at risk of violating the relevant regulations, as well as to limit the risks of loss that the existing businesses may suffer if the diversified businesses fail.
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