There is often confusion surrounding the question “what is a holding company?”. Popular media and Hollywood have inadvertently created a stigma around the term that evokes images of spurious offshore tax havens, crime and money-laundering. This will continue to be beneficial to the sales figures of high-tech Hollywood thrillers, and continue to be both inaccurate and counterproductive to the financial planning industry. A holding company is, like a ‘normal’ company, charity, trust or foundation, a type of legal structure.
In essence, a holding company will exist to either:
A) Hold and control an operational business or businesses
B) Serve as an ownership structure for assets
Examples Of Holding Companies That You May Be A Customer Of…
Those living in Japan will be familiar with Seven & I Holdings. Hiding in plain sight (the clue is in the name), Seven & I Holdings was established in 2005 and is currently the parent company to the following subsidiaries: Seven-Eleven Japan, 7-Eleven, Seven-Eleven Hawaii, Seven-Eleven Beijing, Ito-Yokado, Sogo & Seibu and Seven Bank. Seven & I Holdings also has part-ownership of numerous other companies (i.e is a shareholder) and as is often the case with holding companies, owns a very diverse book of businesses. In essence, the business of this holding company IS businesses.
To cite another high-profile example; are you familiar with any of the following companies?
Wines and Spirits
- 10 Cane
- Château d’Yquem
- Cloudy Bay Vineyards
- Dom Pérignon
- Domaine Chandon California
- Moët & Chandon
- Veuve Clicquot
Watches and Jewelry
- De Beers Diamond Jewellers
- TAG Heuer
- Le Bon Marché
- Starboard Cruise Services
Fashion and Leather Goods
- Donna Karan
- Emilio Pucci
- Marc Jacobs
- Loro Piana
- Louis Vuitton
- Nicholas Kirkwood
- Thomas Pink
- R. M. Williams
Perfumes and Cosmetics
- Parfums Christian Dior
- Parfums Givenchy
- Kenzo Parfums
- BeneFit Cosmetics LLC
- Fresh Inc.
- Make Up For Ever
- Acqua di Parma
- Perfumes Loewe S.A.
- Fendi Perfumes
- Marc Jacobs Beauty
Statistically, the likelihood of you having answered “yes” to the above question is very high. Each and every one of these is a subsidiary of LVMH Moët Hennessy Louis Vuitton SE, better known as LVMH. To make things more complicated, LVMH is itself part owned by another holding company. If this appears morally questionable or even dubious in nature, you are encouraged to take a cursory look at other large household name companies and look to ascertain how they are structured- often a google search will suffice but this will sometimes be a laborious task as large multinationals are invariably complex and often consist of hundreds of subsidiaries located inter-jurisdictionally across the globe to facilitate the tax efficient (i.e path of least resistance) flow of capital. Only this month Google has completed its reorganization into the new holding company Alphabet Inc; the minutiae of which events rarely make it to mainstream media.
Note the clear disparity between profit growth and taxes paid…
Multinationals routinely and systematically use holding companies to structure their businesses to mitigate risk and reduce tax liability. For example, as US multinationals only owe tax on overseas profits re-repatriated to US soil many companies have built up huge offshore cash reserves. Apple, for instance, has more than $100 billion sitting outside the United States. Microsoft has roughly $93 billion, while Pfizer has an estimated $69 billion. We talk more about tax mitigation through jurisdictional arbitrage in our article “Who Has The Lowest Tax Rate In The World?”.
In all likelihood all of the household name banks, media conglomerates, advertising agencies, household products, manufacturers, real estate firms and retailers that you have ever known are either holding companies or the subsidiary of a holding company.
Examples Of Holding Companies As Ownership Structures…
Sometimes holding companies themselves do not partake in any business activity or act as an umbrella for other business entities- they exist solely to hold people’s assets. Holding assets personally in your own name may make you feel wealthy but when it comes time to pay your taxes every year you will inadvertently be less wealthy afterward. At this point it is probably prudent to advise that tax avoidance and tax evasion are very different things; the first of which involves following pre-existing legal guidelines to legally structure your assets so as to pay the least amount of tax possible. The latter is the knowing non-payment of taxes despite having a tax liability- a criminal offence. Suffice to say, tax planning is best left to the professionals as trying to DIY this area could prove to be a false economy in the long-run as any and all errors will be costly.
Having your assets held in a corporate structure removes personal liability. As aforementioned, this may remove or reduce tax liability, as well as protecting the assets from litigation and creditors. This set-up is often preferred by the wealthy as it allows for the efficient transfer of wealth to family members and business partners; the company will have shares in issue and those shares can be allocated to people as required (or even to another holding company…). These shares will confer ownership of a part of the company, and in turn, the company’s assets. Not only could this avoid inheritance tax on death (in the case of a family) but also cut down on administrative expense and the time required in calculating interests in numerous assets and accounts on an ongoing basis where there is more than one stakeholder.
There are fees and ongoing costs associated with maintaining this type of structure and any decision to establish one should come after a thorough cost analysis. That withstanding, where numerous assets and liabilities are involved the benefits are often non-quantifiable (mitigating situational risk), and extend beyond the category of tax planning.
– Herzfeld, Mindy: International Tax Trending 2014, July
– U.S. Department of Commerce Economics And Statistics Administration: Economic and Statistical Analysis Budget Budget Estimates Fiscal Year 2015
– US Federal Reserve – Holding Companies with Assets Greater Than $10 Billion (2015)
– Worldwide Corporate Tax Guide 2014, Ernst & Young