Formation of a holding company

1. Introduction

It is common for groups of companies to be formed in the following way: one entrepreneur (natural person) owns several companies. The formation of a holding structure means that a holding company stands between the entrepreneur and the companies. In other words, the entrepreneur is the owner of the holding company and this, in turn, controls the other companies. Many entrepreneurs are unaware of the advantages of this forming a holding company and often put their personal assets at risk with the business activity they carry out.

Understanding the corporate structure of a holding company can be a way to prevent problems in the future.

Spain’s current legal system has no specific regulations in relation to holding companies, but the Commercial Code does refer to groups of companies. In fact, Article 42.1 of the Commercial Code states the following:

Each parent company of a group of companies shall be obliged to draw up the consolidated annual accounts and the consolidated annual report in the manner provided for in this section.

A group exists when one company has or may have, directly or indirectly, control of another or others. In particular, control shall be presumed to exist when a company, which shall be deemed to be the parent company, is linked to another company, which shall be deemed to be a subsidiary, in any of the following situations:

a) When the company has a majority of the voting power.

b) When the company has the power to appoint or remove the majority of the members of the governing body.

c) When the company may, by virtue of agreements entered into with third parties, dispose of the majority of voting power.

d) When the company has, with their votes, appointed the majority of the members of the governing body, who are in office at the time the consolidated accounts are to be drawn up and for the two immediately preceding financial years (…).

On the other hand, the Corporate Income Tax Act refers to corporate groups in several articles. And lastly, jurisprudence has also been shaping the concept and, in particular, has created the theory known as the ‘lifting of the corporate veil’, which, in the case of fraudulent actions, allows those who actually have ownership of the company to claim it.

2. What is a holding company and how does it work?

A holding company is a type of company organisation, or structure. A holding structure is formed when a company acquires all or most of the shares or holdings of another company, so that it also acquires control over that company. For example, a limited company is formed by other limited companies belonging to the same owner.

The increase in the tax burden on companies as they evolve and grow produces the need to find ways of alleviating that burden, with the utmost respect for the applicable law. A good solution is to form a holding company.

There are several types of holding companies:

• Bank holding company formed by financial entities.
• Family holding company, formed by several companies belonging to the same family.
• State-owned holding company, composed of companies that depend on the State.
• A holding company that groups together companies that seek to optimise resources and that have similar or complementary activities.

It is important to differentiate between a holding company and other structures such as joint ventures, in which two companies create a third, for a given period of time, and exercise joint control.

Likewise, it is important to note that the structure of a holding company is not only suitable for large companies (such as Inditex, Electrolux or Nestlé). In fact, there are more and more SMEs that choose this type of structure for the advantages it provides and which we will detail below.

In addition, the process of forming a holding structure once the companies have been set up is not the same as forming one from the outset. In the former case, a corporate restructuring operation will have to be carried out. Likewise, in order to reduce the tax burden it is essential to comply with the requirements of the special regime for mergers, spin-offs, contributions in kind and exchanges of shares, as we see below.

In order for a holding company to exist from a tax perspective, a series of requirements must be met:

• The holding company must hold at least 5% of the voting rights of the group companies.
• The purpose of holding the shares or holdings is to direct and manage the participation in the subsidiary companies.
• An economic activity is carried out by the holding company.
• The holding company has its own personal and material means.

3. Advantages of a holding structure

There are several advantages of a holding structure.

From a commercial perspective:

• The holding company allows for organising the company’s business areas by creating a company for each branch of activity.
• Upon deciding to sell a branch of activity, it will be as simple as selling the company that carries the activity out.
• If an investor decides to add a new branch of activity, this can be done with a simple increase in company capital corresponding to that branch, without the need for the operation to affect the other branches.

From a tax perspective:

• Corporate tax:
  • The holding structure avoids double taxation on corporate income tax. In order to avoid double taxation, an exemption is applied in the case of distribution of dividends, so that the dividends distributed by the investee company to the parent company are exempt from taxation in the holding company. In addition, the shareholders of the parent company can decide what amount they receive, subject to income tax, and what amount they leave in the holding company.
  • Exemption from corporate income tax on the transfer of the holding company’s shares in the subsidiaries.
  • Dividends received by the parent company from its investees may be used by the latter for new activities (creation of a new company or increase in the capital of existing companies).
  • You can choose to be taxed under the group consolidation regime for corporate income tax purposes.
• Inheritance and Gift Tax. Reductions in Inheritance and Gift Tax will be applied. In the case of a mortis causa succession the incorporation of the value of the holdings of entities that form an economic activity in the tax base, they will be reduced by 95% or 99% in some autonomous communities.
• Wealth Tax. Reductions in Wealth Tax will also apply. The participation in companies that develop economic activities, in which the owner of these companies, therefore the holder, will be exempt from Wealth Tax.

From an organisational perspective:

• When the holding company controls all the others, the decision-making processes are much simpler and faster, which makes the company more competitive.
• Conflicts between shareholders, especially in the case of family businesses, will be reduced because control will be centralised.
  Business risks are reduced, as each company will have its own resources with which to respond in the event of problems, without affecting other companies.
• In the case of family businesses, a family protocol may also be drawn up to regulate the relationship between the partners, the relationship of the controlling company with the other companies and company inheritance.
• The holding company can also protect the real estate of the companies, so that it is owned by the holding company.
• General services, such as administrative, financial, marketing, accounting or legal services, can be centralised in the holding company, and therefore reduce costs.
• The brand’s reputation will be improved and greater trust and confidence will be generated in customers, suppliers and partners. In addition, it will be easier to access public tenders and obtain bank financing.

4. What is the special regime for mergers, spin-offs, and contributions in kind and exchanges of shares? What are the advantages?

The special regime for mergers, spin-offs, contributions in kind and exchanges of shares is regulated by the Corporate Income Tax Law. The aim of this regime is to ensure that when a company carries out a restructuring operation, the decision to do so is not taken for tax reasons but for economic criteria.

The main advantage of the special regime is the deferral of income taxation, which is evidenced by the transaction.

The requirements to be met for this regime are as follows:

• The corporate restructuring operation must fit into one of the concepts established by law:
  • Merging. Here, one or more companies transfer their assets and liabilities en bloc to another, either existing or newly formed.
  • Spin-off/demerger. In a demerger, a company divides its assets into two or more parts and transfers them to two or more existing or new companies.
  • Contributions in kind of a branch of activity. A company contributes one or more branches of activity to another, either existing or newly formed, and in exchange receives securities in the capital stock of the acquiring company.
  • Exchange of shares. Here, a company acquires a stake in the capital stock of another company and thus acquires the majority of voting power.
• The operation must be reported to the Spanish tax Agency.
• The operation may not involve tax fraud.

The Spanish tax Agency analyses each case in detail, so it is important to ensure that the requirements are met with the help of a specialist tax adviser.

5. Valid economic motives for the application of the special regime

The conclusions of the decision of the Economic Administrative Court of 8 October 2019, based on several rulings of the Supreme Court, is important to consider when carrying out a corporate restructuring and in order to benefit from the special regime. The conclusions are as follows:

• The burden of proof corresponds to the company wishing to avail itself of the special regime to prove the facts entitling it to this regime. The Administration, for its part, will have to prove the lack of economic reason.
• The Administration may use the presumptions as evidence, in order to prove that the operation is carried out for purposes of tax fraud or tax evasion.
• The economic motives must be seen from the perspective of the companies involved in the operation and not from the perspective of the shareholders. The economic rationale must relate to:
  • Business reorganisation or restructuring.
  • The improvement or rationalisation of the economic activity of societies.

The economic motives cannot therefore refer to ending conflicts between shareholders or separating activities by companies.

6. What are the steps for the formation of a holding company structure?

The steps for the formation a holding structure are as follows:

1. Study of the current situation and objectives. The initial study will determine which activities the company carries out and what assets it has, among other aspects. In addition, the following should be studied:

• Contracts signed with customers and suppliers.
• Lease agreements that have been signed on real estate (commercial premises, industrial buildings and offices, for example).

On the basis of the above study, the objectives to be achieved will be determined: to protect the shareholders’ personal assets, to reduce the amount of taxes paid, etc.

2. Formation of the holding company. The holding company is formed in a similar way to a private or public limited company. The steps are as follows:

• Applying for a non-registered name at the Commercial Registry
• Obtaining the provisional CIF from the Spanish Tax Agency.
• Drafting and granting of the public deed of incorporation before a Notary Public, which will include the corporate bylaws containing:
  • The company management system, which could be: sole director, joint and several directors, or board of directors).
  • The way to execute the distribution of dividends among the partners.
  • How the purchase and sale of shares and holdings for the entry of new partners will be carried out and under what conditions.
  • Agreements concerning the management of the actions.
• Payment of taxes.
• Obtaining the definitive CIF.
• Registration in the Commercial Registry.

3. Contribution of assets to the holding company. The shareholders will contribute assets (which must be valued), shares in other companies or cash. The percentage of each shareholder’s participation in the holding company will be determined on the basis of what they deliver.

4. Definition of the valid reasons for the application of the special regime. As mentioned above, for the application of the special regime for mergers, spin-offs, contributions in kind and exchanges of shares, it is necessary to put forward valid economic grounds which must be established in relation to the holding company being set up and not from the in relation to the shareholders.

5. Communication of the inclusion in the special regime for mergers, spin-offs, contributions in kind and exchanges of shares. The inclusion in the special regime must be communicated to the Spanish Tax Agency and can be done through this web page. It is important to carefully analyse whether all the requirements are met and, above all, to provide a valid economic motive. The Spanish Tax Agency studies each case in detail to avoid tax fraud or evasion.

7. Conclusions

As you can see, there are several advantages to forming a holding company to organise groups of companies.

However, in order to achieve the objectives that have been set from a business perspective, it is essential to contract qualified professionals both in the process of setting up and in the implementation and maintenance of the holding structure.

If you would like us to take a look at your case, do not hesitate to contact us and we will help you throughout the process by providing our knowledge and experience in the formation of holding companies.