If you choose to form a holding companyor hold shares of one, you should familiarize yourself with the tax implications of these companies. Even if you only receive dividend payments coming from a single share, tax consequences exist.
If, however, you have your own holding company and that company owns your own shares of a corporation, most of the dividends the company gets paid are tax-free. The country’s law for taxes, specifically subsection 112, allows for dividend deductions from the corporation for your holding company. Tax law requires the company and corporation to have a connection. For those within the highest tax bracket, deferred taxes in this situation amount to around 30 percent of taxable income.
Tax Implications for Holding Companies
There are numerous reasons a successful business may choose to create or purchase another business. In this case, you must consider revenue, the location of the owner, and the owner’s long-term business goals. Companies can form subsidiaries to enter risky businesses as parent companies will not have liability in the case of debt from a failed subsidiary.
This comes from the fact that a parent company is legally separate from subsidiaries. Subsidiaries are able to make decisions without parent company approval. Most parent companies retain control via the creation of subsidiary bylaws or ensuring they are the sole shareholder. As the companies remain separate, so are their taxes.
It is important to note that IRS regulations deter the movement of taxable income among subsidiary and parent companies. This includes the rule that international subsidiaries must pay parent companies for the use of any intellectual property that is American, something which began in 2013. Parent companies only avoid liabilities for the subsidiaries of taxes in cases when the two companies operate independently in an obvious manner. In any case where it becomes clear that the companies actually act as a single one, the IRS will require back taxes.
To add to the semi-complicated nature of holding company taxes, there are also multiple methods that allow for deferring taxes. One method is to have many shareholders. You can then create a separate holding company corresponding to every shareholder within the corporation. This delivers flexibility for shareholders and the holding companies control each person’s dividend payments.
Another option is to split the income by having multiple people own your holding companies. This method essentially divides any dividend payments as well as the taxes owed on them.
You can also defer taxes by utilizing retirement funds. Essentially, you would use holding company assets in a way similar to a pension, letting you use the assets upon your retirement.
Or you could form a trust, such as family trusts to hold company shares. The holding company and your entire family would benefit. In this case, the holding company can receive dividends via beneficiary status, with those dividends usually being tax-free.
It is also possible to send company profits to your holding company via dividends. When the business needs cash, you can send those funds back. This allows you to keep any profits away from creditors without having to remove it from the business.