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Custom Guide To Setting A Holding Company

Guide For Singapore Permanent Residence Application

The purpose of holding corporations is to acquire shares in other companies. This is not the same as purchasing stock in another company, however. Equity ownership pertains to ownership in a corporation, regardless of whether or not that company issues shares. 

parent company, capital gains tax, tax benefits

For instance, if you join two additional partners in owning a corporation, you become an equity owner whether or not shares are issued. Owners of stocks are a sort of equity owners. In addition to shares, holding corporations may also possess hedge funds, real estate, and song rights, among other forms of equity. Holding firms manage the ownership of virtually all valuable commercial assets.

So, what is a holding corporation exactly, and what purposes does it serve? Find out by reading on.

What is a holding company’s purpose?

tax incentives, parent company, business operations

To adequately realize the significance of establishing a holding company in Singapore, it is vital first to comprehend what this company form entails. In this way, you will distinguish it from other corporate entities operating in Singapore.

What exactly is a holding company?

A holding company is a corporation that does not engage in its operations, ventures or other active responsibilities. Instead, it exists to acquire assets. In other words, the organization does not participate in the purchase and sale of goods and services. 

Instead, it is created to acquire ownership of one or more businesses. It is a limited liability corporation (LLC), a parent business, or a limited partnership (LP) that controls most of the firm’s stock to establish managerial control. Like other corporations, holding firms can possess assets, pay obligations, and register intellectual property (IP). It is a parent company that forms corporate groups through mergers and acquisitions instead of stock ownership. 

An operating company or subsidiary is a subsidiary controlled by the parent corporation. The most well-known example of a holding company is Warren Buffett’s Berkshire-Hathaway. It is estimated to be valued at $102.8 billion and has subsidiaries in various industries across the globe. Additionally, Berkshire Hathaway has completed over fifty acquisitions and sixty investments.

What purpose does a Holding company serve?

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By creating a holding company, one aims to provide those who own multiple businesses with a means to limit their liability, streamline their management, and retain ownership over each business. A holding company provides the firms with a central point of control. 

As suggested by the name, the goal is to control other corporations’ stock or membership interests, making it one of the benefits of a holding company. Some of its subsidiary companies manufacture, sell, or conduct other business-related activities. Other subsidiaries hold real estate, intellectual property, automobiles, equipment, and other valuable assets utilized by operating corporations. 

The holding company may possess 100 percent of the subsidiary or only enough stock or membership interests to exercise control. Control is the possession of sufficient stock or membership interests to assure that owners’ vote will go in its favor. This can be 51 percent, or a significantly lesser amount if there are numerous owners. Each subsidiary has its own management that oversees daily operations. The holding company’s management is responsible for managing the operations of its subsidiaries. 

They can elect and dismiss company directors and LLC management and make critical policy choices such as merging or dissolving. The holding company’s management is not involved in the daily operations of the operating companies.

What is the legal structure of a Holding company?

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Choosing the appropriate legal structure is essential to the operation of a firm. Whether you’re just getting started or your company is expanding, it’s essential to understand your alternatives. The legal structure of your holding company’s operation impacts tax rates, administration and paperwork obligations, fundraising capabilities, and more. 

As the preceding section indicates, your Singapore holding company can be a limited liability company (LLC), a limited partnership (LP), or a corporation. Some of the world’s top holding firms, such as JPMorgan Chase & Co, a multinational investment bank, are incorporated as corporations.

How do holding companies make money?

Holding corporations are profitable when the firms they own are profitable. A holding corporation might be compared to an investor. You hope that your investment will improve in value or earn profit that you can spend or re-invest. When a business controlled by a holding company does well, its value is likely to rise. 

The holding firm might profit by selling its shares in this company. If the business pays dividends, the holding company will receive dividends in cash that can be used for other investments. If a holding company owns all of its subsidiaries, it can tell the subsidiary how much money it needs to send to the holding company. 

For instance, a holding company might ask its subsidiary to pay it $100 million every year and let the subsidiary keep the rest to grow. Others collect all surplus cash from their subsidiaries.

The holding company will create and sign a deal with the subsidiary containing the following provisions:

  • How much money the subsidiary requires to continue operations. This might be expressed annually and quarterly.

  • How much it will cost to acquire services from the controlling firm.

  • The cost associated with selling to a sister company, assuming one exists.

The holding company may be heavily involved in the subsidiary’s budget and operational management, while others will only intervene when problems arise. The budget will be established before the beginning of the fiscal year and outline the necessary funds for investments, purchases, and other financial considerations. 

By utilizing a budget, the holding company will be able to determine which subsidiary is functioning as expected. If a subsidiary has excess cash, the owning company will decide whether to retain or transfer it. This varies based on location.

Types of holding companies

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Like other companies, Singapore holding companies come in different shapes and sizes, depending on what you want them to do in the end. Here are the various holding companies that a subsidiary company can have in Singapore.

Pure: 

A holding company is said to be “pure” if it was created only to own shares in other companies. Aside from controlling one or more companies, the company doesn’t do anything else.

Mixed: 

A mixed holding company runs its own business and runs another business, and it is also called a holding company that runs its own business. Conglomerates are holding companies whose subsidiaries do business in fields that have nothing to do with each other.

Immediate: 

An instantaneous holding company is a firm that holds voting shares or control of another company, even though another entity already manages the first company. This holding company is considered to be immediate. To put it another way, it is a form of holding company that already functions as a subsidiary of another.

Intermediate: 

An organization that serves as a holding company for another company and a subsidiary of a larger company is called an intermediate holding. Depending on its size, an intermediate holding company might not have to share its financial records.

Offspring: 

An offspring holding company is a new enterprise created to buy another business already in existence.

How is a holding company financed?

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The holding company’s management is in charge of determining where to spend its funds. One method of raising capital for investments is selling equity in the holding company or its subsidiaries. Dividends, distributions, interest, rent, and payments for back-office operations it may provide are all ways it can make money from the fund it gets from its subsidiaries. 

How is a holding company used?

Many different types of businesses use holding corporations. People who acquire shares in some of the most well-known publicly traded organizations don’t realize that they are investing in a holding company rather than in the actual operational company. Large businesses prefer holding companies with several divisions. 

Think of a major firm that makes and sells a wide range of consumer goods, such as hair care, skin-care, and baby-care items, to name just a few examples. One holding company and multiple subsidiaries could come into play instead of a single corporation with various divisions. The holding company could own a controlling interest in each business unit as a holding company. 

It’s possible to segregate the company’s trademarks, equipment, and real estate into subsidiaries, with the running companies paying to license the trademarks, utilize the equipment, and rent the offices.

Not Meant Solely For Large Corporations

Even tiny businesses, such as sole proprietorships, can benefit from forming a holding company. Let’s say someone is interested in purchasing an apartment complex to generate rental income. An LLC might own the apartment building, and the LLC could own the holding company. 

An entrepreneur may seek to extend their business. Fast food business and a racehorse farm are purchased with the money from selling stock in the holding company. For each new investment, a new subsidiary might be established. A holding company structure may also be advantageous for the socially concerned entrepreneur. Benefit corporations, benefit LLCs, public benefit corporations, and public benefit LLCs are all options for the controlling company and its subsidiaries. It’s possible to create a subsidiary for a specific purpose. 

As an example, there could be a group dedicated to saving endangered animals, another to stopping gun violence, and so on. The positive cause advocated by each subsidiary may have investors devoted to it. The social entrepreneurs who own and manage the holding company would also have authority over the subsidiaries and the power to ensure that they are being run in a socially and environmentally responsible manner.

Pros of establishing a holding company in Singapore?

Liability protection:

As a safeguard against legal action, operating companies and their assets are separated into different legal organizations. Each subsidiary is responsible for its debts, and the assets of the controlling company or another subsidiary are out of reach for a creditor of the subsidiary. 

Here’s a classic example. If an entrepreneur’s horse farm is having financial difficulties and has not been able to pay its trainer and veterinarian, the holding company may need to help them out financially. A bankruptcy lawsuit against the subsidiary that operates the horse farm can be successful, but not a case against other subsidiaries that operate a restaurant or apartment building.

Control assets for less money:

It allows the holding company in Singapore owner to gain control over another firm’s assets while investing significantly less money. Management of a subsidiary is immediately transferred to the parent company when it acquires a majority stake. A small business owner can take ownership of many businesses with a relatively minimal expenditure by purchasing less than 100% of each subsidiary.

Foster innovation:

There is less danger in investing in startups or other initiatives that appear risky because running companies are different entities. A primary reason for restructuring and creating Alphabet was that Google stockholders were concerned about investments in fields like robotics, Glass, life sciences, and medical research, among others, which Google had made. 

Thanks to a restructure, these expenditures were decoupled from the company’s most successful parts, such as its search engine and YouTube channel.

Lower debt financing costs:

A holding company in Singapore with financial strength may typically acquire loans for a lower interest rate than its operating firms, particularly where the business in need of cash is a startup or other venture considered a credit risk. Lower debt costs With the loan in hand, the parent business can next disburse the funds to its subsidiary.

More Room For Development And Growth:

Another advantage of a parent company, it provides more room for growth and development. Specifically, the holding company’s valuable assets allow the organization to:

  • increase the efficiency of your diversification, 

  • make new investments, 

  • and, if necessary, quit existing ones.

The holding company and the group’s assets are unaffected by the operating firms taking these actions. Holding companies provide the firm and its subsidiaries more leeway to invest in larger initiatives.

No day-to-day management:

With a holding company, you don’t have to worry about the day-to-day running of the businesses you control. There is no need for the holding company’s owners and managers to be aware of the day-to-day operations of the subsidiaries because each subsidiary has its separate management in place. 

A parent company’s management is nearly always retained following the acquisition of another subsidiary. Owners of future subsidiaries will consider this while choosing whether or not to consent to the acquisition. Except for strategic choices and performance monitoring, the holding company can choose to stay out of the subsidiary’s day-to-day operations. 

Capital gains tax benefits for parent company:

Consolidated tax filings can save money for holding firms that own at least 80% of each subsidiary. All acquired companies’ accounting records are included in a single tax report called a “consolidated tax return.” In this instance, if one of the subsidiaries suffers a loss, the profits of the other subsidiaries will compensate for it. A smaller tax bill is another benefit of filing a consolidated return.

How do you create/register a holding company in Singapore?

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To begin, you’ll need to submit an application to the Accounting and Corporate Regulatory Authority (ACRA), Singapore’s official company registrar.

To do this, you’ll have to:

  • Have your business name registered and approved.

  • Acquire a company registration number from the ACRA.

If all documents are submitted and the application is completed correctly, the process should take between one to three days. Seek advice when you are uncertain about your application. Otherwise, the application process may be delayed. 

Determine whether or not a holding company structure is right for you before you register it. Take time to ponder what you want to achieve, as well as your business type before making this decision. Singapore needs to be at the top of the list when picking a jurisdiction. 

It’s easy to see why Singapore has become a popular location for entrepreneurs to set up holding corporations because of its many advantages and ease of application. Entrepreneurs will also find Singapore’s legal structure and rules to be favorable for the tax liability.

What type of business entity to form?

The most common structure for a holding company in Singapore is a private limited company (PLC) or a limited liability corporation (LLC). The following steps are what you need to do in Singapore to form a holding company:

  • A minimum of one stockholder (this can be an individual or a company)

  • A local director is at least present (must be a resident of Singapore and be over 18 years of age)

  • At the very least, a full-time secretary

  • S$1 is the bare minimum for setting up a company.

  • A physical location where official correspondence can be sent.

  • A bank account for a business

Holding companies are common in the business world. One example is Johnson & Johnson, which has several subsidiaries in Singapore and uses Singapore as its regional headquarters for the Asia-Pacific region. Neutrogena and Ethicon are two of J&J’s subsidiaries. Singtel and DBS Group are two other well-known Singapore-based holding businesses.

What tax treatment should they receive for federal income tax purposes?

corporate profits, corporate income tax, private companies, subsidiary company

Owners of stock in a company should be aware of the tax consequences. A dividend payment from a firm will have tax ramifications if you receive them. Dividends paid to your company, on the other hand, will be tax-free if your shares in the corporation are owned by a holding company you control. 

Dividends paid by your business entity to your Singapore holding company may be tax-deductible in some countries. In most provinces, the deferred tax amount for those with the highest tax rate is around 30 percent of their taxable income.

Where should each entity be formed?

You must register your holding company in Singapore in a state and supply information about the company’s name, articles of incorporation, and the agent responsible for operating and holding the company. 

It’s possible to represent both the operational and holding companies if you so desire. This document outlines your firm’s objective, lists its executives, and specifies how business-related decisions are made. Additionally, you’ll need to open a bank account for your holding business, and there must be separate bank accounts for operational and holding firms and different bank records.

Deposit Subsidiary Company Assets

An investment holding company, rather than the operational firm, holds the wealth generated by your company. The operating firm can then borrow this money as needed. While starting a holding company, your subsidiary company can sell its assets to the holding company to safeguard them. You may invest in or acquire tangible and intangible equity from other businesses for your holding company’s growth and diversification.

How should the names for each entity be chosen?

There are just a handful of situations in which a Singapore holding company makes sense, and those are when the company is protecting assets and exerting influence over other enterprises. Starting with the correct name for each entity is a good place to start. 

A Singapore holding company, for example, may be valuable if you are concerned about asset protection. Because of the potential tax advantages, holding corporations may be established. You can shelter the holding company from the operating business’s debt by forming an operating company and an investment holding company, which are separate legal entities. Your holding company’s ultimate goal should be the driving force behind your company’s name selection.

Who should be the registered agent?

tax incentives, registered agent, asset protection

A registered agent only needs to meet a few requirements. Registered agents can be either an individual who lives in the state, domestic or qualified foreign business company with a location in the state that serves as a registered agent. 

The LLC or company cannot serve as its own registered agent in most states. The temptation may be to appoint one of the owners, managers, officers, or employees as the registered agent for entities incorporated or qualified to conduct business in a state where one of the owners, managers, officers, or employees resides. It’s also tempting to use the registered agent role of the company’s lawyer. 

Even though they are quick, these solutions are usually not the best choice. When a summon is served, no one may be present to receive it at the registered office. In some instances, these employees may be unable to handle the importance of the documents at hand because they are preoccupied with their tasks and fail to forward them to the LLC or corporation’s legal counsel on time. 

When a person resigns, retires, or relocates, a new registered agent and office must be designated to take their place. Professional registered agents are typically preferred because they are constantly ready, eager, and able to carry out their crucial responsibilities.

Conclusion

Individuals set up a Singapore holding company to obtain and own shares in other firms with corporate tax benefits. By “holding” stock, the parent firm acquires the authority to influence and direct business choices. Holding corporations offer several advantages, including greater control for a minimal investment, retaining the subsidiary’s management, and lesser tax responsibilities. 

If you require assistance in comprehending the function of a holding company or in establishing one, please get in touch with us with your concerns and questions. We partner with the top firms in Singapore to ensure that all of your corporation registration and compliance requirements are completed.

Our team of experts can deliver all corporate services on a world-class platform at very affordable prices — the best of all worlds.