Holding Company (Parent Company) is a company that owns one or moresubsidiaries, which are controlled and operated.
In practice, there are sometimes distinguished the following terms:
- Parent Company is a term that is more used for a model where the parent company also produces products and services
- Holding Company is a term that is used for a model where one company holds only equity or intellectual property.
Holding Company in practice: The holding company is on the top of the whole structure that owns (usually in the form of shares), monitors and controls the subsidiary. It is quite usual (but not required) that all companies perform under a single brand name. Most often holding company holds only shares, bonds, mutual funds, intellectual property rights (e.g. licenses, rights), or real estate. Each subsidiary then usually produces products or provides services, such as in different countries, in different locations.
There are also models where the role of the individual companies is divided differently (for example, one subsidiary owns the rights to intellectual property, other buildings, other transport and logistics, and other provides another operation, etc.).
Setting up a holding company structure is costly and legally complex. The holding company is based usually for companies that generate large profits or turnover, usually for multinational companies, i.e. companies operating in multiple states or countries. The reason is for the tax and financial reasons (tax consolidation, sharing of operating losses, the distribution costs of research and development, tax optimization), investment protection, legal liability or intellectual property.
Terms of establishment of holding companies vary in different countries and their legal systems. The holding company usually has to own between 80 to 100% of the shares in the subsidiary. States where there is a lot of holding structure, because of favorable legislative and fiscal conditions, are Netherlands, Luxembourg, Cyprus, Malta, Switzerland, USA, United Kingdom and then in a number of so-called tax havens.