Understanding Company Groups and Holding Companies: Key Considerations for Legal and Business Leaders

In today’s global economy, businesses increasingly rely on sophisticated organizational structures to streamline operations, optimize taxes, and manage risks. One popular approach is establishing a company group structure with a holding company at its core. Such structures offer numerous advantages but also present significant legal, financial, and operational challenges. This article provides a guide for legal professionals and C-suite executives that helps to understand the intricacies of company groups and holding companies, as well as highlights benefits, risks, jurisdictional considerations, and strategies for setting up robust group structures.

1. What is a Company Group and a Holding Company?

1.1. A company group is a hierarchical arrangement of companies where a parent company, commonly referred to as a holding company, owns/controls other companies (subsidiary companies). All the companies of a company group normally have the same individuals as their ultimate beneficial owners.

The meanings of the expressions “company group” and “holding company” vary depending on the jurisdiction, area of law, and context in which they are used.

For instance, under section 93(4) of the UK Corporation Tax Act 2010, a “group of companies” consists of a company that has one or more 51% subsidiaries, together with that or those subsidiaries.

1.2. A holding company generally does not engage in direct business activities (e.g. manufacturing and selling goods, rendering services, etc.). Instead, it holds controlling interests in its subsidiaries and oversees their management without participating in day-to-day operations.

The UK company law provides for the following definitions of a subsidiary and a holding company. Under section 1159(1) of the UK Companies Act 2006, a company is a “subsidiary” of another company, its “holding company,” if that other company —

(a) holds a majority of the voting rights in it, or

(b) is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it,

or if it is a subsidiary of a company that is itself a subsidiary of that other company.

In some jurisdictions, holding companies may be banned from running direct business activities. For instance, according to Article 269 of the UAE Federal Decree Law No. (32) of 2021 on Commercial Companies, in the UAE mainland the function of holding companies is limited to the following:

• holding shares or equity;
• providing loans, guarantees, and finance to its subsidiaries;
• acquiring real estate and movable assets for its activities and operations;
• managing its subsidiaries; and
• acquiring intellectual property rights and providing them to its subsidiaries or other companies.

1.3. Doing business as a company group is common for multinational corporations but may be practiced by other undertakings as well.

Where building a group structure is not reasonable, as alternatives, the following means of running business may be considered:

• standalone companies that are not owned/controlled by a parent entity;
• divisional structure where business activities are managed within divisions or branches of one company that have no legal personality.

2. Types of Holding Companies and Company Group Structures

2.1. Types of holding companies (upon the criterion of activity):

• Pure holding companies. They exist solely to own/control subsidiaries without engaging in any business operations.
• Mixed holding companies. They act as holding companies and are simultaneously engaged in their own commercial activities (if such activities are not excluded by the applicable legislation).

2.2. Types of holding companies (upon the criterion of structure):

• Pure holding companies. These are holding companies that are not owned/controlled by other holding companies;
• Immediate and intermediate holding companies. These are holding companies that are owned/controlled by other holding companies.

2.3. Types of company group structures:

• Vertical groups. In such company groups, each subsidiary, except for the one lying at the bottom of the structure, is a holding company in respect of a further subsidiary;
• Horizontal groups. In such company groups, there is one holding company which has two or more subsidiaries, none of which is a holding company in respect of any companies;
• Hybrid groups. Such company groups constitute a mixture of a vertical company group and a horizontal company group.

Choosing the appropriate type of holding company and group structure depends on the business’s industry, geography of activity, goals, risks, and other factors.

3. Why Create a Company Group Structure?

The main advantages of company groups are as follows.

3.1. Asset protection. A group structure provides significant assets protection by isolating key assets from the risks associated with the activities of subsidiaries. By transferring valuable assets (including IP and domain names) to the holding company, these assets are in most cases shielded from the claims raised by subsidiaries’ creditors and are not subject to e.g. an asset freeze (arrest), execution upon property if an action is lost, or liquidation sale in the event of the subsidiary’s insolvency (bankruptcy). This ringfencing strategy is based on the general rule that a parent company (as an entity having a separate legal personality) will not be liable for the debts of a subsidiary. Applicable law may provide for certain exceptions from this rule (such as guarantee for payment/surety for debt, veil-piercing or secondary liability of shareholders) that may vary depending on a particular jurisdiction.

3.2. Risk management opportunities. A group structure may facilitate risk management. Risks can be spread across the company group, and the losses of one group member may be mitigated by profits in another one. The parent company can expand into new industries or regions using separate subsidiaries and spreading risk across different ventures.

3.3. Operational efficiency. A group structure enhances operational efficiency by centralizing control and, ideally, streamlining decision-making processes across subsidiaries. The parent company can ensure consistency in operations, branding, and strategic direction, while key functions such as IP management, financing, or procurement can be consolidated within it.

3.4. Ease of expansion/scalability and sale facilitation. A holding structure provides flexibility for entering new markets by acquiring existing businesses. Sharing infrastructure, technology, expertise, services, etc. may help to reduce costs. A robust group structure may make it easier to raise capital. At the same time, subsidiaries can also be easily divested without affecting the rest of the group, enabling efficient exit strategies for underperforming units.

3.5. Tax benefits. Tax law may stipulate a tax consolidation scheme allowing the losses of one company to be offset against the profits of another company in the company group. Transactions between members may be subject to tax reliefs or exemptions (e.g. for capital gains tax purposes, such transactions may be deemed to take place on a tax-neutral basis, irrespective of the price, allowing the easy transfer of assets between group companies). Moreover, certain jurisdictions offer favorable tax treatments for holding companies.

3.6. Regulatory advantages. For a group structure, it may be possible to extend certain regulatory authorizations to cover other companies in the group (i.e., group members may receive automatic or simplified authorizations due to common control) or utilize intra-group exemptions from regulatory requirements.

4. Downsides of Group Structures

While the benefits of group structures are significant, they also come with certain disadvantages or risks.

4.1. Tax issues

Company groups may face specific tax issues, among which the main risks constitute the following.

4.1.1. Challenging the tax residency of company group members. This may be carried out based on the central management and control rule or the place of (effective) management principle. E.g., in the UK, the overarching case law principle is that a company resides for tax purposes where its real business is carried on, and that is where central management and control actually abides. If a company is truly governed by its directors, central management and control must be found where the directors meet or in another place where they actually carry out the highest level of control of the company. The place of management criterion may be found in double taxation avoidance treaties. Effective management will normally be located in the same country as central management and control but may be located at the company’s true center of operations, where central management and control are exercised elsewhere. The Commentary to Article 4(3) of the OECD Model Tax Convention (July 2008) defines the place of effective management as “the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time.”

4.1.2. Challenging company groups’ arrangements that do not allocate the right amount of profits (the arm’s length amount). For instance, in the UK, among the measures to ensure that multinational corporations pay the correct amount of tax on the share of their profits arising from their economic activities in the UK (i.e. to combat profit shifting/tax base erosion), the most important measures are the following:

• the diverted profits tax (DPT) regime. The DPT framework is designed to encourage large companies that try to minimize their tax liabilities through the use of contrived arrangements. The DPT was introduced to address the situation where multinational groups deploy such arrangements to divert profits away from the UK to lower-tax jurisdictions;
• the transfer pricing rules. The transfer pricing rules set out how transactions between connected parties are priced for tax purposes. This includes transactions between companies in the same company group. The rules ensure that the UK can tax its share of profits in accordance with the internationally recognized transfer pricing principle (known as the arm’s length principle);
• the controlled foreign companies (CFC) regime. Pursuant to the CFC regime, a UK resident company may be taxed on a proportion of the profits of certain UK-controlled, non-resident companies in which the resident company has an interest. Control is decided by referring to legal control, economic control, a joint venture test, or accounting standards. The CFC rules were designed to prevent UK tax resident companies from artificially diverting UK profits to controlled companies in overseas jurisdictions.

Moreover, the UK tax authority (HMRC) may challenge corporation tax base deductions in intra-group loan relationships. This occurs when HMRC finds that the main purpose for being a party to the loan relationship is to secure a tax advantage for itself or another group member (the “unallowable purpose” rules).

4.1.3. Mixed Activities. Having activities of different natures within the same company group (e.g. trading and investment activities) may limit tax reliefs and have other adverse tax implications.

4.2. Other disadvantages/risks of group structures:

4.2.1. Conflicts between the holding and subsidiary companies. Such conflicts may arise when subsidiaries feel they are not given enough autonomy (or are even forced to commit certain actions) or when they make decisions that are not in line with the holding company’s interests.

4.2.2. Delays and a lack of flexibility in decision-making. In group structures, decision-making can be more complex and slower since the will of the parent company and the overall group strategy need to be implemented through the internal decision-making processes of subsidiaries (with due regard, inter alia, to the tax residence issue).

4.2.3. Set-up costs and complicated finances. Structuring a company group across several jurisdictions needs careful planning and particular jurisdiction-focused professional advice (e.g. on legal, accounting, and tax issues), as well as entails other set-up and maintenance costs. Group structures can quickly complicate finances, which may result in difficult financial administration and accountancy costs.

4.2.4. Shadow or de facto director liability. Holding company executives may inadvertently become shadow or de facto directors of subsidiaries, exposing themselves to personal liability. The concepts of shadow or de facto directors are recognized in certain states, mainly in those whose legal systems are based on common law (e.g. the UK, Cyprus, Canada, etc.). A de facto director is someone who assumes responsibility to act as a director, although never actually appointed as such. A shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act (but such a person generally does not assume any liability of a director). The concepts of shadow director and de facto director are different, but there is some overlap. A person may be both a de facto and a shadow director at the same time. Shadow and de facto directors can be held liable for breaches of different duties imposed on company directors by various acts of legislation (including corporate, tax, bankruptcy, AML/CFT, and other laws) similarly to formally appointed directors. The tax position of a company may be compromised if it is managed and controlled by e.g. a shadow director resident abroad.

4.2.5. Piercing the corporate veil: The formal separation between a parent company and its subsidiaries may be disregarded if undue control is exerted over the subsidiaries, potentially holding the parent liable for the subsidiary’s obligations. The piercing corporate veil (veil-piercing) doctrine may be applied by the courts of different states (e.g. the USA, UK, Germany), as well as by arbitral tribunals.

4.3. The aforementioned risks may be mitigated. Among possible risk mitigation measures company groups may consider the following:

• Seeking and following legal and tax advice tailored to specific jurisdictions.
• Ensuring economic substance in the place of company incorporation (i.e. maintaining real business activities in each jurisdiction, such as having a physical office, employees, etc.).
• Introducing adequate corporate governance (i.e. establish a clear governance structure that separates management between the holding company and subsidiaries).
• Engaging local directors (i.e. appoint local directors to manage subsidiaries, ensuring independent decision-making).

5. Key Factors to Consider When Choosing a Jurisdiction for a Holding Company

Selecting a jurisdiction for a holding company is a critical decision that impacts tax efficiency, legal compliance, and business strategy. Key factors include:

• Legal requirements. Relevant opportunities and restrictions should be taken into account and carefully considered.
• Fit for purpose and business strategy alignment. The jurisdiction should fit long-term goals with due regard to business expansion, industry focus, regulatory compliance (including AML/CFT compliance), and risk management.
• General reputation and the rule of law. Law-bound and politically stable countries with a strong legal framework, respect for private property, and adequate protection and enforcement of ownership and IP rights will ensure confidence.
• Tax efficiency. Consideration should be given to the jurisdiction’s tax rates, double taxation treaty (DTAs) networks, and participation exemptions for dividends and capital gains.
• Substance requirements. Many jurisdictions now require companies to maintain real economic activities, such as having an office and employees in the relevant country to be considered as its tax resident.

Along with other set-up options, the UAE free zones may be considered. Offering zero corporate tax, no withholding tax on dividends, no restrictions on capital repatriation, as well as other opportunities, UAE free zones have become a popular destination for multinational groups. Some UAE free zones expressly provide for the possibility of setting up a holding company within their frameworks.

6. How to Create a Company Group?

Setting up a company group structure requires meticulous planning and ensuring compliance with local and international regulations. Key steps include:

• Determine the objectives. Clearly define the strategic goals for creating the company group, such as risk management, tax efficiency, or operational expansion.
• Determine the type of holding company and draft the group structure chart. Decide whether the holding company will be pure or mixed, and create a chart outlining the hierarchical relationships among the parent company and subsidiaries.
• Choose jurisdictions for establishing the holding company and subsidiaries. Select jurisdictions that align with the existing tax, regulatory, and business needs, as well as offer favorable conditions for the group’s activities.
• Obtain in-depth legal and tax advice in respect of the jurisdictions chosen. Consult legal and tax professionals to assess the regulatory landscape and compliance requirements in each chosen jurisdiction.
• Establish the group members (or implement the group structure with existing entities). Incorporate new entities or restructure existing companies to fit the new group structure.
• Organize a corporate governance framework. Define clear roles, responsibilities, reporting lines, and decision-making procedures across the group to ensure proper oversight and governance.
• Put in place necessary intra-group agreements. Draft and execute agreements governing IP licensing, service provision, and other key operational arrangements between group members to formalize intercompany relationships.