HOLDING: a legal-tax key to serve the entrepreneur

Published on February 27, 2024

Business Law

Optimizing one's taxation and remuneration, facilitating the transfer of one's company, raising funds, investing in new projects, pooling costs, these are just some of the reasons for a business leader to create a holding company. Very common in business life, holding companies indeed offer many financial, legal, tax and asset advantages.

Entrepreneurs, find below why you should consider its creation to develop a long-term management strategy for your professional and personal assets.

A first legal lever for streamlining management and costs

As a reminder, a "holding company" (or parent company) is a company formed to hold, or even control, other companies called subsidiaries. The holding company and its subsidiaries will then form a "group".

De cette structuration juridique découle déjà un premier avantage : celui de pouvoir rationaliser la gestion de ses sociétés et de mutualiser les fonctions supports au sein du groupe. En outre, cette organisation offre aussi un outil de gestion de trésorerie efficace au dirigeant puisque toute société du groupe pourra prêter ou emprunter de l’argent à toute autre.

The holding company, a true tax safe for optimizing remuneration and investments

But it is above all the plethora of tax advantages that emerge from the corporate organization via a holding company, to the point that the latter is regularly described as a "tax sesame" by practitioners.

Let's start with the distribution of dividends, which, facilitated and tax-optimized through various preferential regimes, allows the creation of a piggy bank serving the strategy of the business leader.

The parent-subsidiary regime, for example, offers the holding company an exemption from income tax on dividends received from its subsidiaries (subject to a reintegration of 5%^[1]). But it is also possible for the holding company to benefit from "tax consolidation." This regime, under stricter conditions, not only allows an exemption from tax on the distribution of dividends – this time up to 99% – but also centralizes the taxation of the parent company and its subsidiaries while balancing the profits and losses of all entities in the group. Loss-making companies will thus reduce the overall taxation of the group. Useful for smoothing out your tax burden…

Through the facilitated flow of dividends from the various companies, the holding company thus becomes a true safe. At its helm, the business owner can not only optimize their compensation by planning the payment of dividends from the holding company in their favor based on their needs or changes in their tax bracket, but they will also have the ability to reinvest in new projects without having to first pay a heavy personal tax on the income from the companies they would hold directly.

Benefit from financial leverage to invest

Regarding investments and reinvestments, these can benefit from the financial leverage that the holding company offers. In this sense, setting up such a company will allow the entrepreneur not to have to go into personal debt to invest (maximizing their personal borrowing capacity and reducing their risk) since it is the holding company that will borrow to finance, for example, the acquisition of a new company. The dividends paid by the new subsidiary to the holding company will allow the loan to be repaid with minimal taxation, unlike the taxation the director would have had to bear by personally receiving dividends in order to then repay their own loan. Loan interest and other financial costs can also be deducted by the parent company to reduce its taxable income.

An effective transmission tool

In addition to facilitating the management of the business owner, setting up a holding company is also beneficial for short- or long-term sale operations of a company. Indeed, French law offers holding company holders several favorable regimes regarding capital gains on sales.

An entrepreneur wishes to sell their directly held company? Rather than facing maximum taxation on the capital gain to be realized (30% under the PFU^[2]), the contribution-sale mechanism^[3] will allow the future former business leader to benefit from a tax deferral, subject in particular to reinvesting at least 60% of the sale proceeds in an economic activity within two years of the sale. To this end, a holding company will be formed to which the business leader will contribute the shares of their operating company before their actual sale to the final buyer. This will require some legal-tax engineering, but will ultimately result in significant savings for the seller…

Regarding the sale of a subsidiary again, but this time over a longer term, a holding company can also benefit from the "Copé" niche which offers, again under conditions^[4], to have its capital gain on sale exempted up to 88%. If we apply a corporate tax rate of 25%, this results in a tax of 3%. We are therefore dealing with a sale in quasi-tax exemption, unlike a sale of a company held directly.

But it is also the transfer of the holding company itself that can benefit from tax advantages. The General Tax Code thus provides for "enhanced" allowances (between 50 and 85% of the amount of the capital gain) depending in particular on the holding period of the securities.

Finally, with regard to transmission to descendants, the holding company is also compatible^[5] with the favorable regime of the Dutreil pact ^[6] which allows the transfer of a business while benefiting from a 75% allowance on inheritance tax.

Each situation is different and specific, but every entrepreneur will find their interest in setting up their holding company. Its structuring must, however, be subject to legal, tax and accounting support to avoid setbacks, particularly with the tax authorities.

Glossary:

^[1] Thus, based on a corporate income tax rate of 25%, the holding company's taxation will only amount to 1.25% (i.e., 25% × 5%) of the distributed amount

^[2] Single flat-rate levy, also called Macron "flat tax"

^[3] The "famous" 150-0 B ter referring to the article of the General Tax Code

^[4] The shares must have been held for at least 2 years and represent more than 5% of the subsidiary's capital

^[5] Subject in particular to the condition that it qualifies as a "managing" holding company

^[6] https://www.entreprendre.fr/enieme-assaut-contre-le-pacte-dutreil-un-outil-juste-et-necessaire-de-transmission-de-lentreprise-pourtant-meconnu/