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An Introduction to Holding Companies In Ireland

It's a gorgeous day here in Tramore. A bit of a nip in the air but beautiful sunshine. The seagulls seem happier and some early morning walkers are enjoying a stroll on the prom.

What a feast of rugby we had last weekend. Some unreal performances from Henshaw, Beirne, Conan, and Sexton to give us all a lift. And wipe that smug smile off Eddie Jones’ face and a fitting send-off for CJ Stander! Amazing that there was so much more drama to come in the Wales French match. It was an unreal second half with Wales about 10 seconds away from winning a grand slam, only to give a penalty away. Whoever gave away that penalty will have his head down for a few months/years/lifetime! France were the usual. Part brilliant and part crazy with discipline not catching them. The ref finally woke up and punished Wales for consistent fouling, so they had fewer bodies on the pitch at the end. Scotland France will be well worth a watch this evening. Will the French be able to make up the points difference on Wales?

A special mention about our soccer team on Wednesday night and I confess I only saw the first half. Although beaten they are trying to play in the right way. And we scored two goals after not seeing a goal from open play in a long time. And the first goal we scored was from open play and created from great passing and skill. Keep doing what you are doing and results will come. It's so good to see the team trying to play in the right way and not hoofing the ball high and long like in a long kick contest.

Last week we had a look at company liquidations and how this can be helpful from a Capital Gains Tax position. In case you missed it Click here

This week we are going to give a brief overview of holding companies. What they are, how they work, and a few examples.

1. What is a holding company?

Like the name suggests it holds something. What it usually holds are shares in other companies. That can be shares in trading companies, investment companies, or a mixture of both. It can also hold property and other investments.

Don Simon owns 100 shares in DonHoldco Ltd. DonHoldco Ltd owns 100 shares in Simon Ltd. In this example, Holdco sits on top of the trading company. Don Simon owns the shares in the trading company by owning 100% of the shares in DonHoldco

2. Why a holding company?

There can be so many reasons, but I will touch on two to give some examples.

Don Simon is looking to get out of the business and two managers in the business, Dick and Jane, want to buy Simon Ltd. He plans that DonHoldco will sell the shares in Simon Ltd and the money for the sale will stay in DonHoldco. DonHoldco will use that money to invest in a few different projects.

Awashwithdosh Ltd is a successful cleaning company and has €4 million in the bank. The bank is now charging them for holding this cash. The owner Joe wants to use the cash to buy some investment properties in the company. Joe sets-up a holding company Joeholdco Ltd. He also set-up another company Joeinvestco Ltd that he will use to buy a commercial unit in his local town. Awashwithdosh Ltd pays a dividend of €1 million to Joeholdco Ltd. Joeholdco invests €1 million in Joeinvestco Ltd. This company now has funds to buy the unit. Joe now has 3 companies. Joeholdco Ltd sits on top of his trading company and his investment company.

3. Tax Advantages

Yes, there are a few. The main one is Capital Gains Tax as in the Holdco pays none. This is on the sale of a trading company by a holding company. Pay none is right but the money stays in the corporate structure and doesn't come to you. There are a few conditions;

  • Holdco owns the shares in a Tradeco for 12 months in the last 24 months
  • Holdco owns 5% or more of the shares in Tradeco
  • The Tradeco must be resident in the EU or a country in which Ireland has a double taxation agreement

An Irish Holdco selling shares in a US Tradeco would qualify once it owns 5% of the share for more than 12 months. While the US is not in the EU there is a double taxation agreement between the two countries.

In DonSimon's case, Donholdco sells the shares in Simon Ltd to Dick and Jane for €2 million. Donholdco has held the shares in Simon Ltd for 2 years. So, Donholdco meets all the conditions for CGT relief and doesn't pay any CGT. The full €2 million sits in Donholdco and is available for investment. If Don Simon wanted to get the money for himself, he would have sold the shares in Donholdco to Dick and Jane. Assuming he didn't qualify for Entrepreneurs Relief his CGT liability would be

Sales Proceeds€2,000,000
Capital Gains Tax33%€660,000
Net Proceeds After Tax€1,340,000


You see that he can have €2million in the company to reinvest or have €1.34 million in his bank account.

4. Dividends

Donminu Ltd is a trading company importing and selling fruit in Ireland. That company owns a few commercial properties and gets annual rent of €100,000. As part of a company reorganisation Don Minu sets-up a Holdco Minu holdings Ltd. This holds the shares in Donminu Ltd. For the year ended 31 December 2019, there is a close company surcharge of €15,000 on the rents in Donminu Ltd. To avoid this Donminu Ltd can pay a dividend of €60,000 to Minu Holdings Ltd before the 30th of June 2021.

If the holding company wasn't there, the dividend would go to Don Minu and he would be liable for higher tax rates on it. As Minu holdings Ltd got the dividend it will not pay tax on it. There is no tax on a dividend from one Irish company to another Irish company. But the correct withholding tax returns need to go to Revenue. While Minu Holdings Ltd will have no tax liability, it is liable to a close company surcharge. For the year ended 31 December 2021, it will have a surcharge on the dividends it receives. It will have until the 30th of June 2023 to pay a dividend to Don Minu to avoid that surcharge.

A company can elect that the dividend from tradeco to holdco that doesn't avoid the surcharge. The advantage of this is that a surcharge doesn't then apply to the holding company. This is what Awashwithdosh Ltd and Joeholdco would do when paying the dividend of €1 million.

Summary

Ireland is an attractive destination for holding companies. The CGT exemption is a huge attraction but there are many other benefits too. We are in the EU and we have about 70 Double Taxation agreements in place. It is a topic that should be on the table for some of our clients. It can be easier to move money around from one trading company to another. Money from a successful trading company can set-up a separate investment company

Interested in finding out more? Call Deirdre on 05139670 or contact us. Tell us a bit more about you and how can we help.



 

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