Business in Spain: Use of Holding Companies
In the business world, the holding company concept is becoming increasingly fashionable. Many companies choose to set up a holding company to facilitate management and to achieve higher profits. In this article we explain what a holding company is and what its advantages are, how it works and how it makes profits.
DEFINITION OF A HOLDING COMPANY
A holding company is a conglomerate of companies that are grouped together under the control and management of a holding company. This company is the one that controls all or most of the shares of this company.
In a holding company there is a group of companies that may have a different corporate purpose. These companies usually have their own legal personality, but do not have decision-making power. The holding company is regulated at the level of a group of companies, according to Article 42 of the Code of Commerce, which determines that, for a group of companies to exist, a company must hold or may hold, directly or indirectly, the control of one or more other companies.
Control shall be presumed to exist where a company, which shall be regarded as the parent, is in any of the following situations in relation to another company, which shall be regarded as a subsidiary:
- Holds a majority of the voting rights.
- Have the power to appoint or dismiss the majority of the members of the management body.
- May dispose, by virtue of agreements concluded with third parties of a majority of the voting rights.
- Has appointed with its votes the majority of the members of the administrative body who hold office at the time the consolidated accounts are to be drawn up and during the two immediately preceding financial years. In particular, this shall be presumed to be the case where the majority of the members of the board of directors of the controlled company are members of the board of directors or senior management of the parent company or of another company controlled by it.
A holding company can be created in the same way as a normal company. The main difference is that you can also create it from an existing company.
TYPES OF HOLDING COMPANIES
There are various types of holding companies, which can be organised according to different criteria. Depending on the type of control exercised by the holding company, there are mainly two types of holding companies.
Pure Holding Company
A pure holding company is one that is constituted in such a way that its objective and focus is the holding of shares in companies, and it often acts as a financier of the companies in the group, even its activity is focused on the purchase and sale of shares or participations in companies, with no other activity than the holding, financing and purchase and sale of companies. It is a holding company that does not usually carry out any type of activity.
Mixed Holding Company
The mixed holding company is distinguished by its dual role. In addition to controlling the activities of its constituent companies, it also undertakes its own business operations. This often includes providing management services, administering investee companies, and offering administrative, accounting, or human resources support to its dependent entities. This model fosters cost savings and creates valuable synergies within the group.
Mixed holding companies are particularly popular due to the substantial tax benefits they offer. A common example is when the holding company centralizes services like accounting, administration, or human resources for all its subsidiaries. To explore how this structure can benefit your business, consider reviewing our Accounting Portal or learning about Outsourced Accounting.
ADVANTAGES OF A HOLDING COMPANY
The holding company structure offers a multitude of benefits, from risk mitigation to significant tax efficiencies.
Risk Diversification
One of the foremost advantages is the ability to diversify risk. By compartmentalizing activities within separate subsidiary companies, the financial and operational risks of one entity do not necessarily impact the others or the holding company itself. This separation provides a crucial layer of protection across the group.
Centralized Management
A holding company facilitates centralized and coordinated management across diverse business interests. As the majority shareholder, the holding company appoints the directors of its subsidiaries, who are then accountable to the parent entity. This structure ensures that the holding company’s directors (often comprising family representatives in family businesses) are fully informed of all subsidiary activities.
This centralized approach leads to more agile organization and decision-making, offering tax and legal benefits that are often unattainable with more fragmented shareholding structures. For more insights into legal compliance, refer to our guide on Demystifying Legal and Financial Responsibilities for Companies in Spain.
New Shareholder Entry & Disinvestment
The holding structure simplifies the process of bringing in new shareholders for a specific activity. A straightforward capital increase, along with a waiver of pre-emptive acquisition rights, can facilitate the entry of a valuable shareholder (e.g., for financial capacity or industry expertise) into a particular business. Similarly, disinvestment becomes simpler; a sale of shares can be 100% exempt (95% from 2021) from Spanish Corporate Tax (Art. 21 LIS), provided certain double taxation avoidance requirements are met.
New Market Penetration
Holding companies also ease the penetration of new markets through strategic business acquisitions. These acquisitions can be efficiently financed by the liquidity that flows seamlessly, both financially and fiscally, within the group. Simple dividend distributions to the holding company, often without withholding tax, enable the parent company to use subsidiary profits to fund strategic acquisitions or international expansion (e.g., by incorporating a new company or purchasing a foreign entity). Subsequent divestment or sale may also be exempt from corporate income tax in Spain, depending on relevant tax conventions.
Business Succession
Ensuring a smooth and unified business succession is another critical advantage. Inheriting families receive shares in the holding company rather than directly in individual subsidiaries. This prevents the testator from assigning companies piecemeal to heirs, thereby preserving the integrity of the subsidiaries. To further safeguard the business group’s longevity, establishing family protocols is highly recommended.
Inheritance Tax Advantages
Mortis causa transfers (due to death) are significantly protected from Spanish Inheritance and Gift Tax (with a state reduction of 95%, and regional reductions potentially up to 99%). Similarly, Inter Vivos transfers (donations) can benefit from a 99%-95% exemption, with no personal income tax implications. It’s crucial to note that these reductions typically apply only to assets actively used for business activities. For example, if a property is incorporated into an activity without proof of its assignment, tax authorities may challenge the reduction.
Corporate Tax Consolidation
Holding companies can opt for the special tax regime of consolidation in Corporate Tax (IS). Broadly, and under specific conditions, this allows the group to present a single taxable base, enabling the offsetting of losses from some companies against the profits of others. This regime also exempts the group from obligations related to the documentation of related-party transactions between group entities. To better understand tax obligations in Spain, read our guide on Taxes in Spain.
Dividend Distribution
One of the most compelling tax advantages of a holding company is the distribution of dividends. When a holding company meets the requirements of Article 21 of the Corporate Income Tax Act, dividend distributions are 95% exempt. This means only 5% of the dividends are taxed, resulting in an effective corporate tax cost of just 1.25% (at a 25% corporate tax rate).
In contrast, if dividends are received by an individual, they would be taxed at 19% to 26% under the Savings Tax Base of their personal income tax return (Modelo 100). This represents a substantial tax saving of over 25% when routing dividends through a holding company.
These distributed dividends can then be used to capitalize another group company via a tax-exempt capital increase, or to meet the financial needs of the holding company through a simple dividend distribution, agreed upon by the general meeting at any time. For more information on tax models, see our explanations of Modelo 210 and Modelo 714.
Enhanced Group Appearance
Presenting as a unified business group to economic agents (such as financial institutions, public authorities, etc.) significantly enhances credibility and facilitates access to credit, often under more favorable conditions. This unified presence also enables the group to bid for public tenders that a single, independent subsidiary might not be able to secure on its own.
Conclusion
Undoubtedly, the holding company structure offers profound legal and tax advantages for businesses in Spain. These structures simplify and rationalize business operations that would otherwise be more complex and heavily taxed without the figure of a parent company.
At Accompany, we are dedicated to being your strategic partner, assisting you in navigating Spain’s dynamic business environment. To learn more about our comprehensive support, visit our Business Services page or explore our FAQs section for more detailed answers to common questions about business in Spain.
