The holding company: A Valuable Tool with Tax Complexities to Master
A holding company, be it structured as an SPFPL (a financial holding company for regulated liberal professions, such as medical professionals or public and ministerial officers) or in a more conventional form of a commercial entity, offers substantial advantages in specific scenarios, as elaborated below.
Our expertise in the realm of holding companies encompasses various sectors, each with its unique constraints, particularly in the context of regulated professions. Nevertheless, the fundamental characteristics of holding companies, briefly described below, remain consistent, regardless of the nature of the activities carried out by the subsidiary companies.
Given the unique nature of its operations or its raison d’être, the use of a holding company within a Leverage Buy Out (LBO) structure can give rise to tax complexities that Houdart A&C is proficient in handling, as an expert. We indeed offer audit and accounting services for holding companies. It is important to anticipate potential issues before implementing a financial structure involving a holding company in order to optimize the financial and tax aspects.
Definition of a Holding Company
A holding company is an entity whose primary purpose is to hold financial interests in other companies in order to ensure financial complexities such asconsolidated financial reporting, tax planning, risk management, and strategic financial analysis.
Although there isn’t a specific legal definition of a holding company, the General Tax Code makes several references to it. This lack of a legal definition is due to the broad nature of the concept of a holding company and the diversity of functions it can perform.
A holding company can take the form of a commercial company, a civil society, or a financial participation company for liberal professions (SPFPL). In our capacity as an expert accountant, Houdart A&C can assist you in crafting the articles of association for your holding company to align them perfectly with the intended role you wish to assign to the holding company.
The concept of control by one company over another is defined in the French Commercial Code, particularly in Articles L233-3 and L233-4 and subsequently in Article L233-16. Understanding this concept is crucial, as it determines when a company that holds shares in one or more other companies is obligated to prepare consolidated financial statements, subject to specific thresholds.
Specific information regarding the exercise of control over subsidiaries is a vital component that must be disclosed in the financial statements of the holding company.
Houdart A&C, as a chartered accountant, is well-positioned to provide advice on structuring the acquisition of a target or a restructuring involving a holding company. Prior to establishing a holding company, it is essential to clearly define its role and the financing structure of the group, enabling the identification of potential tax risks arising from the structure.
Classification of Holding Companies
Tax experts and chartered accountants commonly distinguish between two primary categories of holding companies, with the main challenge being of fiscal nature :
- “Passive” or “pure” holdings that are limited to the mere ownership of shares in other companies.
- “Active” or “operating” holdings, which not only manage their shareholdings but actively participate in the strategic decision-making of the subsidiaries they control, providing them with administrative, legal, accounting, or financial services.
Advantages of a Holding Company for Clients
Legal and operational advantages
Establishing a holding company can bolster your negotiating leverage with banking institutions within a group of companies. The holding company assumes the responsibility of negotiating financing on behalf of the operational companies in the group, potentially furnishing banks with guarantees based on the assets or shares of these subsidiaries and refinancing them through related debts.
In principle, the group is positioned to secure more favorable financing terms than if each group company negotiated individually.
Thanks to its financial capacity, the holding company can offer guarantees and sureties to its subsidiaries to ease their financing, especially in the context of contracts that necessitate bank guarantees.
Lastly, from a legal standpoint, a holding company can leverage its capital ownership, as explained in further detail below, a technique often used when acquiring a target company through a Leveraged Buyout (LBO) structure, either by operational companies or an investment fund.
Advantages of a holding company in an LBO structure
By becoming the majority shareholder of a holding company, which, in turn, holds the majority shares of an operating company, an individual can control the holding company and all its subsidiaries while owning less than 50% of the capital of the operating company.
This strategy allows for the multiplication of control strength while minimizing the need for equity capital. The controlling company plays a pivotal role in decision-making within the target company and can often dictate its choices, subject to the provisions of shareholders’ agreements that typically address control matters. Shareholders’ agreements are commonly employed in such arrangements to safeguard the interests of minority shareholders.
Legal leverage effect can be increased by creating a cascade of holding companies, a more complex approach with added tax risks. It involves establishing a chain of holding companies that collectively own at least 51% of their subsidiary.
In the context of acquiring a target company, it is generally more advantageous to set up a holding company to deduct the interest on the acquisition loan for tax purposes. This is not feasible with personal debt, but financial leverage extends beyond this concept.
When the profitability of an economic asset exceeds the cost of borrowing, it is economically preferable to finance the asset acquisition through debt and minimize the amount of equity investment. This is because the expected return on equity is generally higher than the cost of debt.
The potential return on equity is even higher when a significant portion is financed through borrowing, as the asset’s profitability, irrespective of its financing method, is usually achieved with a reduced equity contribution. The only limitation is the ability to repay the loan through cash flows generated by the asset.
The acquisition holding company is inherently structured to maintain a consistent deficit due to the debt incurred during the acquisition of the target company. This is attributed to the fact that financial charges are deductible while the dividends received from the target, which serve to cover the loan repayments, are generally not taxable, except for the proportional share of associated costs and charges.
Tax leverage consists of implementing all available tax measures to optimally absorb the structural deficit of the holding and reduce the tax effects on the flows between the target and the holding.
Under the parent-subsidiary regime, the parent company benefits from a corporate tax exemption on dividends received from the target company, with the exception of a 5% share reserved for associated costs and expenses. This system largely eliminates the double taxation on dividends, which originate from profits already subject to corporate income tax at the subsidiary level. To leverage these benefits, both the parent and subsidiary companies must, of course, be subject to corporate income tax, and the parent company must maintain a minimum 5% ownership of the capital in the subsidiary distributing the dividends.
Tax consolidation is a regime that allows for the formation of a single tax group. Corporate tax is paid by the holding company, on the collective results of the entire group structure, after applying certain adjustments. The holding company’s deficit, often associated with deductible financial expenses, can be offset against the profits generated by the operating subsidiaries. This approach significantly minimizes the tax impact of dividend payouts, reducing the proportional share of expenses from 5% to 1%.
Advantages of a holding company for regulated professions
A holding company offers numerous advantages for regulated professions, a service area where Houdart A&C, a chartered accounting firm, provides accounting services and expert support. These benefits encompass:
- Streamlined Acquisition : the acquisition of regulated liberal professions by enabling the deduction of interest on loans related to the acquisition. This is analogous to the approach taken by buyers of professional partnerships (SCP) when operating within a Liberal Professional Company (SEL).
- Share Valuation : the valuation of shares in a Liberal Professional Company (SEL) by facilitating their acquisition through a holding company. This provides immediate access to financial capital without the need to await the sale of the professional practice.,
- Interprofessional Collaboration : holding companies are especially valuable for creating interprofessional structures that unite multiple regulated liberal professions. The legislator has created the SPFPL (Société de Participation Financière des Professions Libérales) for this purpose.
The Société de Participation Financière des Professions Libérales (SPFPL) is a legal form of a holding company specifically designed to cater to regulated professions, allowing for the ownership of one or more stakes in Liberal Professional Companies (SEL) operating across various regulated professions. The primary objective of the SPFPL is to facilitate collaborative practice among liberal professions. It should be noted that the SPFPL primarily functions as a controlling entity (holding), rather than an operational company.
Fiscal characteristics of holding companies
VAT Pro Rata or Deduction Coefficient
In essence, a company’s entitlement to deduct VAT on its expenses is contingent upon those expenses being associated with goods or services utilized for the execution of taxable transactions that grant the right to such deductions. This is subject to the absence of any specific restrictions or exclusions.
In scenarios where a company engages in a combination of VAT and non-VAT or VAT-exempt operations, which is often the case for mixed or operational holding companies, the deductible tax relating to each good or service is proportionally determined by a “deduction coefficient.” This coefficient is computed based on the liability coefficient, taxation coefficient, and admission coefficient.
A holding company receives dividends, which are not subject to VAT, and potentially may generate income from various sources, including interest on loans extended to its subsidiaries. If the holding company’s activities are solely focused on managing these financial assets, the expenses incurred for this purpose may not be eligible for VAT deduction.
However incase where the holding company generates income from the active management of its subsidiaries or from another economic activity, VAT on general expenses not directly attributable to the financial or economic activity besomes deductible subject to the proportionality established by the aforementioned deduction coefficient.
The distinction between an operating holding company and a pure holding company is important in this context. Houdart A&C, as a chartered accounting firm or statutory auditor, has extensive experience in handling situations involving holdings and companies engaged in partially non-VAT or VAT-exempt activities. We are well-equipped to provide our clients with the necessary guidance to clarify their tax positions
Based on current jurisprudence, the taxation coefficient for mixed holdings excludes dividends from the denominator, as these dividends do not constitute consideration for an exempt (non-VAT) activity. Consequently, the receipt of dividends does not impact the VAT deduction capacity of the holding company.
It is pertinent to note that, since the holding company actively participates in the management of its subsidiaries by providing administrative, technical, accounting, and other services, it is considered to be engaged in economic activities. In this context, the receipt of dividends from its subsidiaries is deemed irrelevant, as confirmed by legal precedent.
Tax on wages
The tax on wages is due by companies that employ individuals not subject to value-added tax (VAT) on their entire revenue. It is calculated based on the wages paid during the year using a progressive scale.
A holding company employing personnel may therefore be subject to this tax depending on its VAT deduction eligibility, which is determined by its deduction coefficient.
Undercapitalization related to a financing holding company
When a holding company extends significant financing to its subsidiaries, which may be deemed affiliated companies as per Article 39.12 of the General Tax Code, through means such as current account advances, convertible bond subscriptions, or related debts, it is essential to be vigilant regarding the various interest deduction limits outlined in the General Tax Code (CGI). These limits encompass rates and amounts when undercapitalization of the financed structure (subsidiary) occurs. If the companies in the group formed by the holding company and its subsidiaries are eligible for fiscal integration, any potential limitations on net financial expenses are assessed based on the group’s overall capitalization
Frequently Asked Questions Regarding Holding Companies
What Legal Form Can a Holding Company Take ?
There is no specific legal form exclusively designated for a holding company, except for certain regulations applicable to regulated professions. Consequently, a holding company can be established as a commercial entity, a civil entity, or a professional financial participation company (SPFPL). The use of an SPFPL is the only legal form suitable for acquiring stakes in Liberal Professional Companies (SEL) across various regulated liberal professions.
What is the corporate purpose of a holding company ?
The holding company is in fact a company like any other, distinguished only by its business activities. The purpose of a holding company is to hold financial stakes in other companies to ensure control, financing, direction, or management.
In the Articles of Association, the corporate object may be articulated as follows: :
“The company’s purpose is the acquisition and management of portfolios of securities and other investment assets, as an active or passive holding company, all investments or reinvestments in the financing of any commercial, industrial, artisanal, professional, agricultural, or financial activity, and more generally, all real estate and movable property investment operations, including through capitalization contracts. It may carry out any operations that are compatible with this purpose, related to it, and contribute to its achievement.”
What is a Société de Participation Financière des Professions Libérales (SPFPL) ?
The Société de Participation Financière des Professions Libérales (SPFPL) is a type of holding company dedicated to regulated liberal professions, allowing for the holding of one or more stakes in liberal professional companies (SEL).
The “Services” Directive of 2006 and the Law of March 28, 2011 paved the way for the capital interprofessionalism of SPFPLs, which are a legal tool for the consolidation of multiprofessional liberal practices.
Can a holding company deduct VAT on its expenses ?
The VAT deduction capacity on the general expenses of a holding company depends primarily on the nature of the holding company. A pure holding company is not able to deduct VAT as it does not have any activities subject to VAT. On the other hand, an operating holding company will be able to deduct VAT on expenses that are not directly attributable to either its financial or economic sectors, up to its deduction coefficient. It should be noted that, according to current case law, dividends received from its subsidiaries do not affect the VAT deduction capacity of the holding company that interferes in the management of these subsidiaries by providing administrative, technical, and accounting services.
What is undercapitalization ?
Undercapitalization of a company refers to the insufficiency of its capital compared to its financial debts.
From a tax point of view, undercapitalization is precisely defined in Article 212 of the French General Tax Code (CGI) which imposes a reduced cap on the deduction of net financial charges related to debts owed to affiliated companies within the purview of article 39.12 of the General Tax Code when undercapitalization thresholds are reached.
What is a shareholders’ agreement (or partnership agreement)?
A shareholders’ agreement, also known as a partnership agreement, is an optional extra-statutory document that complements certain operational regulations of a company, with the fundamentals outlined in its articles of associations.
The content is flexible. The Pact generally contains various clauses relating to the share capital, the exercise of voting rights, organizational and operational aspects of the company, requirements for approval or modification of capital distribution in the event of a transfer, and more.
This type of agreement provides the advantage of confidentiality, as it does not impose the same disclosure requirements as the company’s articles of association. However, it binds only the signatories and does not impose obligations on third parties, unlike the articles of association. The articles of association may stipulate the signing of a shareholders’ agreement as a suspensive condition for approval by the general meeting when an individual buys shares or subscribes to a capital increase as a shareholder.
What services does Houdart A&C firm offer for a holding company ?
Whether we act as chartered accountants or statutory auditors for a holding company and its subsidiaries, our expertise is grounded in our technical accounting and tax proficiency, as well as our capacity to anticipate the challenges inherent to your financial structure.
Our chartered accountants can help the board of directors in determining whether establishing a holding company is advisable, managing bookkeeping services for your holding company and its subsidiaries, providing advice on the choice of legal status for your holding company, overseeing legal changes in your holding’s capital, and providing social management. In the context of your group’s development and performance, we conduct due diligence on identified targets, perform business valuations, and prepare business plans, among other services.
As statutory auditors, we are committed to maintaining a constructive and adaptable approach, relying on the trust and efficiency built with your teams. We provide recommendations by reviewing internal processes and conducting economic, tax, and social analyses of your subsidiaries to ensure that our involvement contributes effectively to your business goals beyond the reporting abd certification of the accounts.