As business owners or entrepreneurs, whenever you have considered restructuring your business, the concept of having a holding company must have crossed your mind at some point in time. It is fair to say that owning and handling the operations of a holding company requires in-depth knowledge on your part.
Without the right information at your disposal, you might not ever experience all the holding company benefits, especially in terms of tax reductions. Therefore, it’s critical to first understand the structure, size, and expansion plan of your own business, before venturing out into the industry of profitable holding companies.
In this comprehensive article, we will provide you with every bit of information related to owning a profitable holding company, and at the end of it, you will surely learn how essential a holding company can be when the profit margins of your business are concerned.
Without further ado, let’s jump right into the thick of the matter –
The Primary Benefit of Using a Holding Company
Reduction of taxes rates is a crucial aspect of any business and all businesses strive in their own ways to derive the maximum benefits.
But do you know that starting a holding company can essentially reduce your tax rates on dividends received from your business to an astonishing figure of almost less than 1%?
More than a great piece of news this unbelievable tax reduction could come to you as an utter surprise, especially if your business is operating in one of the high-tax jurisdiction countries of the European Union.
Most investors follow the traditional route of using a limited liability company for taking care of their business activities. The biggest mistake they make in their business endeavors is that they keep direct hold of the shares of their business as an individual.
Now why this is a mistake?
Simply because the personal dividend income of all those investors will be taxed at a high rate of 23.5%, on average in the European Union. In the same stratosphere of business, there exist innumerable proven legal possibilities to reduce this exorbitant tax rate and bring it down to less than 1%.
If you are still finding it difficult to believe, we urge you to keep on reading and save some big money for reinvestment…
By the time you reach the end of this article, you will have a well-defined roadmap on how you can legally reduce the enormous tax burdens on your business by using a profitable holding company, as the owner of your active business limited liability company.
Let us start by having a close look at the ordinary tax slabs or rate of taxation on dividends that are received by a business owner living within the European Union holding shares of a company as an individual –
In Europe, if you are operating at the level of an LLC or Limited Liability Company, the dividends that have been received from the already taxed profit margins, are once again subjected to tax rates at the personal income tax level that usually hovers around the average range of 23.5% in the European Union.
The established norm is that on average the European LLC levies a CIT or Corporate Income Tax of 21.7% already. This literally means that businesses operating and earning profit in Europe that are already being taxed at a rate of 21.7% on average are taxed once again, on top of that 21.7%, at a rate of 23.5% on average in the EU.
Now, let us focus purely on numbers
If we take an example of a European LLC that has a profit margin of EUR 100K, we will see that in Europe the hard-earned money of the business is getting taxed on average at 21.7% Corporate income tax ( CIT), which amounts to 21.700€.
The profits that remain for distribution as dividends are 78.300€
Now, as a business owner who receives those dividends as an individual, these dividends are going to be taxed again at the personal income tax level (PIT) on an average of 23.5%, which amounts to 18.400,50 €.
So, from EUR 100 K Profit, we come down to EUR 21.700 CIT + EUR 18.400, 50 € PIT, which amounts to EUR 40.100,50 in Total Tax.
Following this simple calculation, the profit margin that remains with the Business Owner is only EUR 59.899,50. In layman’s terms what this translates to is that out of a total profit margin of EUR 100 K, only a little less under EUR 60,000 remains as profit with the business owner.
So bottom line the proceeds of your business are taxed with more than 40% if you hold the shares of your business as an individual
This automatically brings us to the tax-saving options that rest with entrepreneurs and business owners who do not want to spend all of their business proceeds and rather reinvest their money through a profitable holding company.
Let us now focus on the optimization of this profit margin under the umbrella of holding company taxation –
If a shareholder does not hold the shares of a company directly under themselves in an individual capacity or as natural personnel but only holds the shares through another corporation, then the shareholder can invest the received holding company dividends without being personally taxed.
A Polish holding company operating and functioning within the borders of Poland for instance is only liable to payment of taxes on 5% of the dividend income at a Corporate Income Tax of 19% while 95% remain exempt from taxation.
Now let us go back to the previous calculation and see for ourselves how the profit margin gets a significant boost when the shares are held by a Polish holding company –
Out of the total distributed dividend of EUR 78.300€, only a negligible amount of EUR 3.915 (5%) is taxed at the CIT rate of 19%.
This takes the value of holding company taxation to EUR 743,85. Therefore, the profit that remains to invest from the distributed dividends of EUR 78.300€ is EUR 77.556,15.
To put it simply, with a Polish holding company, dividend income is basically –
- Getting taxed at less than 1% instead of the average 23.5%
- EUR 743,85 is getting subtracted from your received dividends in the case of a Polish holding company while on the other side it is EUR 18.400,50 when holding shares as an individual
- You are having a profit margin of EUR 77.556,15 for further investment with a holding company instead of having just EUR 59.899,50 when holding shares as an individual
The other big advantage of starting a profitable holding company as a form of investment is that there is the accumulation of benefits and tax-free disposal of company holdings.
Only at the time of using funds as personal or private assets, an investor is subjected to personal dividend taxation. However, when there is a longer period of investment at the level of the holding company, the tax-free reinvestment advantage kicks in.
For example, if the investment in the case of a Polish holding company yields at a rate of 7% consistently over a period of 10 years, the investor will get an attritional return of approximately EUR 30.000 more when compared to having dividends already taxed at personal income level at the time of distribution.
Again, in the event of the sale of your business, a beneficial holding company structure can offer you significant tax benefits. For example, when your holding company sells the business it owns, the capital gain collected can be zero in many cases.
Parting Thoughts…
It has to be said that there are more famous holding jurisdiction destinations like the Netherlands or Cyprus which offer even more tax advantages and holding company benefits to entrepreneurs and investors.
But there are certain reasons why Poland stands out in our recommendation. To name a few, the country shines in the parameters of cost efficiency, ease of operation, prime location, and other notable categories which the so-called ‘more famous’ holding jurisdictions do not offer.
Click here to read “Why Poland is Your Ideal Holding Company Jurisdiction!”
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Frequently asked questions
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LTC Business Services provides a range of services for businesses including business setup, business support services, commercial representation, workforce solutions, and more.
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