Ideal Holding: Financial Flows and Taxation

holdings

A holding company is an association of legal entities linked by economic subordination. The main, parent company controls the rest of the companies. The only function of the parent company is to own or manage the property of the subsidiary companies.

The relations of companies in the system are usually realized through ownership relations. This ensures the relative independence of the individual elements of the structure. This independence ensures the cost-effective operation of the entire system.

The structure of holding companies consists of standard elements. These are different types of legal entities that are linked by ownership and contractual relationships. The choice of organizational and legal forms of such legal entities is generally limited. The main differences in the relationship between them lie not in the organizational and legal form, but the functional purpose of the elements of the scheme.

The Largest Holdings in the World by Market Capitalization

 

  • Apple (USD881, 980 million)
  • Microsoft (USD803, 090 million)
  • Amazon (USD739, 460 million)
  • Alphabet (USD711, 940 million)
  • Berkshire Hathaway (USD536, 530 million)
  • Johnson & Johnson (USD396, 210 million)

Main Functions of the Divisions of the Production Holding

 

  • Manufacturing.
  • Marketing.
  • Sale of finished products.
  • Supply of raw materials and supplies.
  • Financing of divisions of the holding.
  • Ownership of shares (shares) in other organizations of the holding.
  • Intellectual property rights and royalty accumulation.
  • Management of other organizations of the holding.
  • Provision of legal, accounting, personnel, and other services to other organizations of the holding.

The listed functions can be combined in one element of the holding structure. The corporate structure of the legal entities of the holding company should be distinguished from its organizational management structure and the financial structure. In terms of financial structure, individual functional units are not legal entities, but the so-called centers of responsibility.

The goals and methods of their achievement in various corporate and organizational structures of all holdings are in many respects similar. It is even possible to model an ideal universal project of a holding, which can become a starting point or basis for adaptation to a specific holding formation. Let’s take a look at the large-scale structure of such an ideal international holding, consisting of various foreign organizations.

Characteristics of an Ideal Holding: Ownership Structure

First of all, this is the functional specialization of structural elements. For each task, for example, manufacturing, trading, ownership, etc., a separate company is created for reasons of control. It is logical to formalize each major center of responsibility as a separate legal entity. This brings the corporate, management, and tax schemes of the holding into line.

First, the optimization of taxation presupposes the choice of the organizational and legal form of the company, the taxation system, and sometimes even the country of its registration. This choice is determined by the functional purpose of the company and the requirements for asset protection so that the bankruptcy of one of the organizations does not adversely affect other elements of the holding’s structure.

Secondly, the tree structure of ownership. The ownership scheme has the form of a tree: from each node of the scheme, there can be several “branches” ending in nodes. Further, new branches can grow from these nodes. The tree-like structure seems to be optimal for providing owners with end-to-end control overall structures of the holding.

This scheme is most consistent with the principles of transparency of ownership as a factor of investment attractiveness and provides a natural settlement of the interests of all co-owners of the holding at the level of statutory documents of the parent holding company.

Companies around the world are often created to ensure the procurement of goods, raw materials, materials, and the sale of the holding’s products. The country of registration of foreign subdivisions of the holding is chosen arbitrarily or based on tax considerations. The foreign holding company is the final node of the entire structure.

Its next elements, as intermediate ownership instruments, are no longer subdivisions of the holding company itself. They, as beneficiaries, own the shares of the parent company. In this case, control over the parent company is exercised by the beneficiaries indirectly through control mechanisms over individual ownership instruments.

Ideal Holding: Structure of Financial Flows

The basis of the holding’s financial well-being is the funds received from the buyers of its products. The funds are transferred to the account of a trade organization or organizations of the holding, which purchases products from the manufacturing organizations of the holding. These domestic deliveries are settled at transfer prices. In this case, the holding’s profit is accumulated in the trading organization and transferred to the parent company for further use.

Likewise, the procurement of raw materials and materials in this scheme is carried out by individual purchasing companies. They transfer their profits to the parent holding company, service, and management companies. Production organizations send profits to their members, or specialized sub-holdings, from which this profit goes to the main holding.

Enterprises pay for the services of specialized service companies of the holding, as well as make royalties for the use of the intellectual property. The company that owns the intellectual property also transfers its profits to the parent foreign company.

For tax reasons, the holding company is advised to make direct capital contributions, replenish its funds, etc., and finance in the form of loans through a separate financial institution or a composite financial structure of several companies.

The final chord is the distribution of the remaining profits, in whole or in part, by the parent company to its shareholders in the form of dividends. In case the beneficiary holds shares through intermediate structures, he has a choice — to receive the money in his accounts or temporarily leave it in the accounts of the intermediate structures. This will allow him to minimize taxation.

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