An holding company is a parent corporation that has a sufficient amount of voting shares in another company so that it can control its management and policies. The sole reason why holding companies exist is to control multiple companies, property, trademarks, and patents. Businesses that are 100 percent owned by a holding company are referred to as a wholly owned subsidiary.
Holding company tax planning can be complicated because the holding company owns a number of individual businesses, similar to the way a person may own individual shares of a company. However, each company stands on its own, having its own series of employees, bank accounts, and offices. To understand what’s involved in strategic tax planning for holding companies, you first have to understand the way that the IRS reviews holding companies.
Taxes For Holding Companies
A business that is successful may want to purchase other businesses for many reasons. Sometimes, the idea is to create a business that has the potential to generate revenue, but in a sector that might be risky. Since the parent company is now liable for the debt of its subsidiary, if the subsidiary fails, the parent company is debt-free.
The subsidiary company has its own management and is able to make its own decisions without permission from the parent company. What the parent company does is serve as the controlling shareholder and creates subsidiary bylaws. As a result, the holding company pays its own taxes on the income it receives and the subsidiaries pay their own taxes on the income it receives.
The IRS expects that the subsidiary would act independently of its holdings company. To that end, in 2013, the IRS put regulations in place requiring a subsidiary to pay taxes if they are using the intellectual property of the holding company. Additionally, if the IRS sees that the holdings company and the subsidiary are acting as one, they will be required to pay back taxes.
Additional Factors to Consider When Engaging in Holding Company Tax Planning
Holding companies have more flexibility and mobility than their subsidiaries. When looking at the balance sheet of a holding company, you will see the majority of its assets are intangible. If their assets are finance-related, and especially if the holding company controls subsidiaries all over the globe, they may not be tied to one jurisdiction. This opens the door for considering a number of structuring options.
Commonly used strategies in holding company tax planning include using intermediate holding companies as a way of getting access to tax treaties, which will reduce the tax burden for all of the companies the holdings company has once profits are distributed to the ultimate parent entity.
Before going this route, it’s good to talk to financial advisers, accountants, and legal professionals who are familiar with these forms of entities. In some cases, the authorities may frown on this kind of set up, feeling that it was created for the unique purpose of avoiding paying taxes.
We have barely begun to scratch the surface of tax strategies for holding companies. What is clear is that holdings companies provide a number of benefits and flexibility when it comes to operating businesses. They provide opportunities to mitigate financial risks and leverage a number of tax planning strategies. We at Fusion CPA have been working with small and medium-size holding companies in Atlanta, Georgia, and throughout the United States. Our goal is to provide answers to questions regarding accounting, tax planning, and planning for the future of your business. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
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