The use of a Holding Company

I am a majority shareholder and director in 2 companies, both operating in the technology sector. The first company is now established; with the second a new start up. It has been suggested to me that I use a holding company, to bring these companies underneath the one corporate umbrella. Can you please offer some advice in relation to same?

There may be benefits to using a holding company or group structure in the situation identified above. The most obvious benefit is the availability of group relief for corporation tax losses and payments. This may be especially relevant given that your first company is well established and one would hope profit making, while the second company is in the start up phase and may be operating at a loss.

Trading losses may be surrendered by one member of a group to another member of a group for offset against profits earned by that company in the same period. For the purposes of group loss relief, Irish tax legislation defines a qualifying group. Two companies will form a group if one company is a 75% subsidiary of the other or both companies are 75% subsidiaries of a third company.

A further relief which might be available relates to Intra-Group payments. There is a requirement to deduct withholding tax on certain payments made between legal entities. These include payments of annual interest, patent royalties, and annuities. Given the sector in which both these companies operate the payment of patent royalties may occur.

Where a company receives or makes a payment from or to another group company, there is an exemption from withholding tax. For the exemption to apply: the company making the payment or receiving the payment must be a 51% subsidiary of the company receiving the payment, or be a 51% subsidiary of another company where the recipient is also a 51% subsidiary of that company.

The implementation of a holding company, with the required shareholdings would allow your companies to benefit from the above corporate loss and payment reliefs.

A further consideration is the potential Capital Gains Tax treatment on the sale of either subsidiary. The technological sector is fast moving and should you receive an acceptable offer for either subsidiary then a holding company structure provides obvious advantages. Irish holding companies benefit from a full participation exemption from Irish capital gains tax in respect of gains arising on the disposal of shares in certain subsidiary companies. Therefore, provided the necessary conditions are met, the holding company may be in a position to sell the shares in either subsidiary free of capital gains tax.

There are of course other tax and commercial advantages and disadvantages to implementing the suggested group structure and these would require careful consideration before any decision is made. With this in mind, I would advise that you seek professional advice from a qualified tax consultant.