With corporation tax increasing in many jurisdictions, and the 9% corporate tax just getting introduced into the UAE, a lot of business owners are starting to look closely at what they think is a better tax route.
Whilst many people have heard about holding companies, when asked about what the differences are, it's not always easy to understand.
It's also very important to know, that getting a bank account for a holding company, although not impossible, is certainly more complex with multiple layers of KYC checks needed. The bank has to work much harder to understand the potential risks and credit worthiness of the holding structure to make sure they understand all of the assets and income streams generated from its subsidiaries.
An operating company is responsible for the day-to-day management of the business. It is often the subsidiary of the holding company. A holding company owns a company's assets (such as intellectual property, stock and equipment used by the operating company, real estate).
A holding company and an operational company are two distinct types of business entities, each with its own purpose, structure, and function. Here are some key differences between the two:
- Holding Company: A holding company is a business entity created primarily to own and manage investments in other companies, assets, or securities. Its main purpose is to hold, control, and manage these investments, and it usually does not engage in the production, distribution, or sale of products or services directly.
- Operational Company: An operational company, also known as an operating company, is a business entity that actively participates in the production, distribution, or sale of goods and services. It is involved in the day-to-day operations and management of its business.
- Holding Company: The primary activities of a holding company include acquiring, managing, and divesting ownership stakes in other companies, and collecting dividends or capital gains from these investments. A holding company may provide support services like management, financial, or legal guidance to its subsidiaries, but it generally does not engage in direct business operations.
- Operational Company: An operational company's activities encompass a wide range of functions related to the production and delivery of goods and services. This includes marketing, sales, research and development, manufacturing, and customer service, among others.
- Holding Company: A holding company may own shares in multiple subsidiary companies, each operating independently or as part of a larger corporate structure. The holding company may also have an ownership stake in other holding companies.
- Operational Company: An operational company typically has its own organizational structure and management team, focused on executing the company's business strategy and operations.
- Holding Company: By separating the holding company from its operational subsidiaries, the holding company can often limit its liability exposure. If a subsidiary faces legal or financial issues, the holding company's assets may be protected from these liabilities, depending on the jurisdiction and corporate structure.
- Operational Company: An operational company is directly responsible for its actions and the consequences thereof. This means that it may be held liable for any legal or financial issues that arise from its operations.
- Holding Company: The financial performance of a holding company is primarily derived from the performance of its subsidiary companies and investments. The holding company's revenues usually come from dividends, interest, and capital gains from its holdings.
- Operational Company: The financial performance of an operational company is determined by its success in generating revenues from its core business activities, such as selling products or services.
- Holding Company: Tax treatment of holding companies varies depending on the jurisdiction. In some cases, holding companies can benefit from preferential tax treatment, such as reduced tax rates on dividends and capital gains.
- Operational Company: An operational company is typically taxed on its income from business operations, including sales revenues and other income sources. It may be subject to various taxes, including income tax, value-added tax, and other industry-specific taxes.
If you'd like some help with company setup and restructuring in Dubai, please get in touch and I'd be happy to help.
