The patrimonial holding company is a little-known legal structure, yet it offers numerous tax advantages and greatly facilitates the transfer of business ownership.
What is an asset holding company?
By definition, a holding company is a legal entity (a company) with no business activity of its own: its sole purpose is to hold shares in other companies.
The asset holding company is therefore a parent company holding the shares of other daughter companies in which the assets are invested.
Exception: in the case of a single shareholder, the asset holding company can also be used to invoice advisory services provided by the shareholder.
What legal structure for an asset holding company?
An asset holding company can be set up under a variety of different statutes, depending on the number of partners, capital, articles of association, etc.
- Société Anonyme (SA)
- Simplified joint-stock company (SAS)
- Limited liability company (SARL)
- Non-trading company (SCI)
Why set up an asset holding company?
Setting up an asset holding company involves a lot of red tape and extra management work, but the benefits are many.
Exemption of investment income under the parent-daughter regime
In order to avoid double taxation, income from participating interests accruing to parent companies is exempt from corporation tax, subject to the reintegration of a share of costs and expenses fixed at 5% of the total income from participating interests(Articles 145 and 216 of the CGI). However, there are 2 conditions to this exemption:
- The shares held must represent at least 5% of the subsidiary’s capital,
- They must be kept for at least 2 years,
This enables cash to be brought up to holding level and then used for other investments.
Exemption for part of long-term capital gains
On the sale of equity interests, 88% of the capital gain is tax-exempt, provided the shares have been held for at least 2 years (long-term capital gains regime).
Example:
- Acquisition of shares in 2020, for a value of 100,000 euros
- Sale of these shares in 2023, for a value of 200,000 euros
- The capital gain of 100,000 euros is tax-exempt to the extent of 88,000 euros, and only a capital gain of 12% (12,000 euros) remains taxable.
Exemption from Impôt sur la Fortune Immobilière (property wealth tax)
In the case of an active holding company, i.e. one that actively participates in the management of the group and controls the activities of the subsidiaries, the shares may be exempt from wealth tax.
However, the services provided by the animating holding company must appear in the group’s accounts. This is much more suited to large companies than to small family holdings set up for the sole purpose of managing real estate assets.
Tax consolidation
The holding company can be used to centralize the taxation of all subsidiaries in a group. In this way, the profits and losses of the various daughter companies offset each other, resulting in reduced taxation.
Please note that this only applies to subsidiaries that are at least 95% owned.
Passing on to heirs
Holding companies can also be an effective way of preparing for succession.
In particular, a shared donation can be used to transfer shares in an asset holding company to heirs. They benefit from shares in the holding company, which will appreciate in value over time, and can also receive dividends each year.
The “Dutreil Pact” introduced by Law no. 2003-721 of August 1, 2003 also allows, under certain conditions, the transfer of a family business to benefit from an exemption from free transfer duties, following a death or gift.
What are the risks of an asset holding company?
The holding company’s many tax advantages have led to numerous abuses in the past (particularly in terms of invoicing between group companies), with the result that tax authorities have stepped up their controls.
To avoid potential problems, which could lead to the repayment of tax benefits received and the payment of penalties, you should pay particular attention to :
- Invoicing between group companies, which must under no circumstances be carried out with the aim of reducing taxable profits (“abnormal management act”).
- The notion of “animation” of the holding company, which must be demonstrated by the partners in the event of control.
To avoid unpleasant surprises, it is therefore advisable to call on the services of a chartered accountant, capable of advising the manager on his choices and helping him to stay within the law.
A holding company to develop your assets
A holding company is a powerful tool for building wealth. By keeping investment income in your holding company rather than distributing it to yourself, you can avoid a 30% flat tax and reinvest almost all of this investment income in new investments.
Example:
- If I hold 5% of shares in company A as an individual. Investment income of €20,000 will be taxed at IR and I will then have €14,000 left in my pocket after taxation at the PFU of 30%.
- If I hold 5% of shares in company A with my holding company B. The investment income of €20,000 will be exempt from corporation tax in my company B, except for a reintegration of 5%, i.e. €1,000, which will be taxed at the corporation tax rate of 15% or 25%. This leaves €19,850 of capital to reinvest (for a 15% corporation tax rate).
This cash flow can be reinvested directly in new shares or real estate, allowing the money invested to grow.
In addition, the holding company can offer a new debt capacity that maximizes the capital invested.
Using a holding company to maintain control
Finally, a holding company facilitates the integration of new investors at subsidiary level, while retaining control of these operating companies.
Example:
- A holding company owns 50.1% of a daughter company A.
- This daughter company owns 50.1% of a subsidiary B.
In such a case, although the holding company only owns 25% of subsidiary B, it has control of this company.
How do you set up an asset holding company?
There are three ways to set up an asset holding company:
- Creation of a new company then acquisition of shares in underlying companies
- Contribution of securities or shares of subsidiaries to the holding company
- Contribution of assets to a daughter company in exchange for shares or securities.
From a legal standpoint, setting up a holding company involves the same steps as setting up a new company:
- Choice of status
- Determining the registered office and name
- Drafting of bylaws. Please note that the corporate purpose of a holding company must be to hold securities, and may be extended.
- Registration of share capital, publication and complete file with the Registrar’s Office.
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