Financing via a holding company

What is a holding?

A holding company is a company whose main corporate purpose is the holding of corporate securities (shares or shares) in other companies. In addition, it may have its own activity and employees, in particular if it invoices services to the companies in which it holds shares. The tax authorities distinguish between “passive” holding companies, which simply hold shares, and “leading” holding companies, which participate in the management, direct the strategy of their subsidiaries and invoice them for specific administrative, legal, accounting, financial or real estate.

Please note : The character of “leading holding company” has significant tax advantages for the owner of the units or shares (in particular an exemption from wealth tax). However, the notion of leading holding company is delicate, in the absence of a clear definition in the General Tax Code. It also requires concrete elements concerning the coordination of the subsidiaries. In order to avoid any risk of tax adjustment of the manager, it is therefore essential to be advised.

How it works ?

The holding company is endowed with capital and quasi-capital by its shareholders. It then seeks additional financing (credit) from banks that will allow it to raise all the funds necessary to acquire the securities of the target company (hence its name “target”). Subsequently, the dividends paid by the daughter to her mother (the holding company) will make it possible to repay the acquisition debt and the interest.

Why choose this setup?

When several partners are involved in the takeover, it is possible that each acquires the share of shares in the company that he wishes to acquire. In this case, each must manage its own recourse to borrowing to finance this acquisition. The holding then constitutes a good solution, because it makes it possible to regulate the financial relations and the distribution of the power between partners by specific provisions in the statutes and/or a partner’s pact. When other acquisitions are planned following the first, it may be interesting to equip yourself at the outset with the tool that will make it possible to organize these operations.
For managerial reasons, a manager may wish to isolate in a separate legal structure certain functions or employees of a certain level. He will thus be able to apply different rules to them (generally more favourable) than those applied to the daughter’s employees.

Finally, taxation is a good motivation for this arrangement:

When the holding company owns more than 5% of its daughter, it can apply the so-called “mother-daughter” tax regime, which partially exempts from corporation tax the dividends paid by the subsidiary to the holding company, taxed at corporation tax up to 5% of their amount and capital gains on securities realized by the holding company taxed with corporation tax up to 12% of their amount.
When the holding rate of the daughter exceeds 95%, the holding company can opt for the constitution of an integrated tax group with its daughter (regime known as “tax integration”), which makes it possible to impute the expenses of the holding company (essentially the financial interests) on the daughter’s results. This leads to savings of around 33% on interest.

What are the alternatives to using the holding company?

Attention, the recourse to this assembly is not free. It is necessary to take into account the costs of incorporation of this company then its management costs over time: specific bank account, cost of drawing up annual accounts and tax declarations, cost of legal management of social life (meeting general, etc). If the motivations for creating a holding company are purely fiscal, the tax savings must therefore be significantly greater than these costs.

The interest in comparison with other schemes (for example the deduction of interest from the acquisition debt contracted by a natural person to acquire company securities) must therefore be verified.

What is leverage?

From a legal point of view: the takeover of the target company is optimized if it is carried out by a holding company interposed between the target and the acquirer(s). The tools offered by company law make it possible to modulate the rights, in particular financial rights, of the various investors through the use of preferred shares and shareholders’ agreements. In this respect, the SAS is the social form that offers the most possibilities. The financial risk for the buyers is also limited in the event of difficulties in repaying the loan (except in certain cases, such as for a
Financially: the takeover holding company may repay the loan contracted for the acquisition of the target company with the dividends received from the target company. This financial leverage effect is very interesting but supposes that the target generates a result allowing a regular and sufficient distribution of dividends. The correct assessment of the future profitability of the target company during the pre-acquisition diagnosis is therefore essential.
At the tax level: the use of the parent-daughter regime or the tax consolidation regime, seen above, allows tax savings which can be significant and will therefore facilitate the repayment of the holding company’s loan debt .