Optimal Structures. Holding Companies 2015

Area: Companies
Author: Ángel José Del Pino Ibáñez
Date: November 2015
Family Businesses.

Family businesses are characterised by bringing together the business and family systems, which entails specific features that are—clearly—the differentiating element that justifies their success worldwide.

Indeed, among these features—as mentioned by Mr. Francisco González, Chairman of BBVA—are tradition and continuity, which foster excellence in the quality of products and services, a long-term vision of markets, customers and the business; flexibility in different environments, as well as ties with the societies where they are established.

Notwithstanding the above, and even though the family business is subject to the same laws and fundamental determinants as any other company and operates in the same competitive environment, it needs to optimise its corporate structure in line with its specific features in order to achieve the highest level of development, growth and profitability.

Paradoxically, it should be noted that the challenges relating to organisational structures (as well as related issues such as adapting secure processes, attracting talent and/or executives, etc.) and balancing the solutions proposed sometimes become all the more difficult the more successful the company is, the more it grows, the more international it becomes… the more complex certain issues become. For example: how can family control be maintained? How can the challenges of growth be addressed? How can flexible and secure structures be established?

Optimal Structures.

Optimising the corporate structures of family businesses has been the subject of study and development, as well as an evolving standardisation process in our environment.

The aim has been to implement a reorganisation that:

1.- Addresses the challenges (or disadvantages) of family companies, such as potential confusion regarding: ownership and governance; governance and management; economic flows; succession; contractual ties, etc.

2.- Facilitates family succession and generational transition; and

3.- Establishes effective financial, tax and operational solutions, taking into account its status as a family company, as well as the nature of the business and the markets in which it operates.

Although it is an instrument applicable to any type of company, whether family-owned or not, in the specific field of family businesses the holding company has been considered particularly useful for structuring the family business around it (where there is more than one company).

This is because, once the holding company is organised, the necessary conditions will have been created to facilitate both the company’s growth and generational succession.

First, because it facilitates compliance with the requirements needed to obtain the exemption from Wealth Tax and, therefore, the 95% reduction in the taxable base of Inheritance and Gift Tax in the event of the transfer of the business to family members.

Second, because there will also be the possibility for the family holding company to be organised as a group of companies from a tax perspective, with it as the parent company, and to be taxed under the tax consolidation system, with the advantages this entails.

Business Groups. Holding Company.

For these purposes, the ideal organisational proposal has focused mainly on structures whose centre is a HOLDING COMPANY. In this regard, the main objectives of a reorganisation around a holding company are as follows:

a.- To manage the family’s companies centrally through a holding company.

b.- To provide services to subsidiary companies from the holding company, taking advantage of economies of scale.

c.- To ring-fence risks, in order to prevent non-business assets from being liable for the results of the business activity.

d.- To reduce—or defer—the taxation of the profits obtained by the company.

There is no concept of a holding company in our legal system; however, under commercial law we can say that it is a holding company whose corporate purpose is to hold shareholdings in other entities. Tax legislation—although without using that term—sets out the requirements it must meet so that the holding company is not considered an asset-holding company; in particular, these are as follows:

1.- To hold at least 5% of the voting rights in the companies in which it participates.

2.- The holding must be for the purpose of directing and managing the shareholding.

3.- To have the corresponding organisation of material and human resources for that purpose.

4.- The investee entity must not be an asset-holding company.

REORGANISATION through a Holding Company & Taxation.

It should be noted that reorganisation processes are—normally—based on the special tax neutrality regime. Indeed, such reorganisation transactions involve transfers of assets between companies and between them and their shareholders. If we apply the general tax regime provided for in the Corporate Income Tax Act, we will normally face such a high tax cost that the reorganisation will be unfeasible (the general tax regime implies including in the taxable base of the transferring companies and their shareholders the income arising from these transactions, calculated as the difference between the market value and what they receive and the net book value of what they transfer, and paying tax on that difference).

Therefore, in order to avoid this tax cost, the entrepreneur must resort to the “special regime for mergers, spin-offs, contributions of assets and exchanges of securities”, provided for in the Corporate Income Tax Act, using the legal forms included therein.

In addition to the positive effects in the reorganisation process, it should be noted that it also provides the following tax benefits:

1.- Exemption of shareholdings from Wealth Tax.

2.- 95% reduction in Inheritance and Gift Tax on mortis causa transfers of the family business (and in some inter vivos cases).

To maintain these benefits, the main requirements are:

1.- That one of the partners in the family group performs management duties in the company;

2.- That such duties account for more than 5% of their employment income or business/professional activities income.

3.- That the family company has human and material resources (i.e., it is not an asset-holding company).

It should be noted that reorganisation processes are—normally—based on the special tax neutrality regime. Indeed, such reorganisation transactions involve transfers of assets between companies and between them and their shareholders. If we apply the general tax regime provided for in the Corporate Income Tax Act, we will normally face such a high tax cost that the reorganisation will be unfeasible (the general tax regime implies including in the taxable base of the transferring companies and their shareholders the income arising from these transactions, calculated as the difference between the market value and what they receive and the net book value of what they transfer, and paying tax on that difference).

IN DIEM offers business and corporate reorganisation services, reorganisation of parent companies and holdings, as well as the corresponding subsidiaries, facilitating the development and expansion of companies according to their environment and business sectors. Should you have any questions, we will be pleased to assist you.