It is common to hear about the potential benefits of the formation of holding companies in case of the family business, where the company's only purpose is to hold shares in different companies. In addition to the fact that its primary objective must be to leverage shares in other companies, to be viewed as a holding company, it must carry out few business activities, and else it will be considered a "passive" holding company.
According to the Spanish Corporate Income Tax Reform, to ascertain whether a company has a business activity or not, every entity where more than 50% of its assets, which entail securities, is instinctively regarded as not having a business activity. Although, when it comes to categorizing a company as "passive," it will not be reckoned as securities, those shares that comprise of at least 5% of the share capital of a company with business exercise and that are held for a minimum period of one year to manage its own shares.
The establishment of a holding company for a family business can enjoy the following advantages from a tax perspective:
1.The privilege of tax exemption to the investee companies
On condition that the crucial requirements are met, which is to hold at least 5% of its subsidiaries or an accretion value of more than EUR 20 million, the dividends dispersed by a subsidiary to its parent holding company will be discharged from taxation in the holding company. Besides, such distribution will not be enforceable subject to tax withholding as it takes place when the shareholder that attain the dividend is a natural person.
Nevertheless, the residues in the holding company will permit it directly or indirectly via the formation or contribution of the surplus to the other subsidiary companies, either to embark on new investments or to encounter the financial needs of the subsidiaries at no cost. It must be acknowledged that both capital increases and contributions to companies are Corporate Operations exempt from Stamp Duty.
This means that this system allows the transfer of "surplus" of a company from the company producing it to the holding company and vice-versa, and, in turn, from the holding company to the company lastly receiving it at no cost.
2.Avoidance of double taxation using Corporate Income Tax
The allocation of shares of a company, whether resident or not, though in the latter case, the non-resident entity must be subjected to a tax similar to the Spanish Corporate Income Tax at a minimum tax rate of 10%. The holding company implements this for the sake of full capital gains tax exemption.
This can be claimed when the holding company has either a shareholding of at least 5% in the investee company before the day when the shares are to be transferred or value of more than EUR 20 million.
3.Advantage of the special tax consolidation rule of Corporate Income Tax
Subsidiaries of a holding company may go for the tax under the special tax consolidation regime only if that all the companies involving the group comply with a series of additional requirements. This means that the taxpayer must act as a unit, a single taxpayer, and the entity accountable for paying the tax debt would be the holding company, whose proportion of share capital and voting rights in each one of the investees should be 75%.
This special tax regime will sanction access to a series of advantages as follows:
- Avoidance of tax retention on payments of interests, dividends, or others prepared between the companies of the group.
- Elimination of intragroup results.
- Tax valuation on net income which aids to automatically reimburse the profits acquired by certain companies with the losses that may have been suffered by other subsidiaries.
- Inordinate options of tax deductions, tax benefits, etc., as the requirements and constraints to their application, are set at a consolidated level rather than individual level. This will allow specific tax reductions to be utilized even though the particular condition of the company giving rise to such right would not have endorsed it.
- Opportunity to exclude the taxpayer's specific documentation linked to its operations with other companies in the group.
4.Probability of benefiting from the special regime for VAT Groups
An essential prerequisite to being eligible for this unique VAT scheme is that the holding company should own 50% of the share capital and voting rights of the other companies in the group. Conversely, the holding company cannot be contingent on any other company located in the same VAT territory.
And the last obligation is that even for the companies whose sole purpose is the holding of shares of the investees will also be recognized as holding companies. The main advantages of this regime will fluctuate according to the modality chosen between the two existing ones, which are Simplified Modality and Advanced Modality.
5.An elucidation in securing other tax benefits
- Exemption from Wealth Tax
- 95% discount in the tax base of Inheritance and Gift Tax
- Relief from the capital gains tax, which results from gifts in the Personal Income Tax
- Even when a family group holds several companies, it is usual that every one of them, individually, meet the preconditions essential by tax legislation to benefit from significant tax advantages.
For the reasons mentioned above, the integration of a holding company should be taken into account, as it bargains the opportunity to achieve a business structure with greater administrative control by decreasing risks and providing more significant tax savings and financial flexibility. The outline of a corporate estate under a system regulated by a holding company is one of the best options for proper management within the family business, not only from a fiscal standpoint but also from an organizational and administrative point of view.
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