Instead of the owners holding shares directly in the three underlying companies, their shares have all been transferred to the holding company. The owners now only have shares in the holding company, while the holding company holds all the shares in the underlying companies.

 

One obvious benefit here is that the administration of the group becomes much more efficient. Instead of each shareholder having to administer his investment in three different companies, which may well all be located in different countries, each of which may be subject to different statutory filing and reporting requirements, he now only needs to be concerned with his obligations in relation to the holding company. Depending on the jurisdiction of the offshore company formation, it is quite likely that the shareholders of the holding company will not have any filing or reporting requirements at all in that jurisdiction.

 

A holding company can also lead to substantial tax benefits for its shareholders. Let us assume that in the last financial year the consulting and investment companies have generated a combined profit of $800,000 but the trading company has incurred a loss of $2,000,000 and that the profits of the consulting and investment companies have been used to support the financial needs of the trading company.

 

If the shareholders held their shares in the three companies directly, then they would have received dividends of $800,000 from the two profitable companies and invested those dividends back into the trading company. In doing so, however, they would have had to pay tax on their dividend income of $800,000. Assuming the rate of personal tax is 40%, the combined tax paid by all the shareholders would amount to $320,000.   This would then only leave $480,000 available for investment back into the trading company.

 

The situation changes dramatically, however, if the three companies are held by the holding company instead. In this case, the dividend of $800,000 is paid to the holding company and not to the individual shareholders. As the offshore company formation would have been arranged in a jurisdiction where no corporate tax applies, the holding company would not be subject to any tax on the dividends it receives.   This means it would be able to retain the full $800,000 of dividends and then freely reinvest this in the trading company.

 

The holding company would not pay any dividend to its shareholders, as the overall result of the group for the financial year would be a loss of $1,200,000. The net effect of this restructuring on the group and its shareholders has therefore been to save $320,000 in tax, allowing this amount instead to be reinvested in one of the group’s businesses.

 

Another significant benefit which a holding company offers is the ability to conveniently change the ownership structure of the group by simply altering the share structure of the holding company itself. Offshore companies generally allow such changes to be effected speedily, typically only requiring a resolution of the board of directors. This can be an important benefit, especially considering that such changes can be very lengthy in some jurisdictions, requiring the preparation of a company valuation, approval from the authorities and the payment of stamp duty before shares may be transferred.

 

A holding company can also provide enhanced confidentiality to the owners of the group, as there will no longer be a need for the identity of the individual owners to be recorded as shareholders of the underlying companies. Instead, the holding company will be shown as the shareholder of the three companies, thus protecting the identity of the group’s owners.

 

Confidentiality can be enhanced even further if the jurisdiction of the holding company does not require its shareholders and directors to be publicly disclosed. Even if such disclosure is required, the identity of the group’s owners can still be kept confidential by using nominee shareholders and professional directors for the offshore company formation.

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