Why a holding company structure is essential for every entrepreneur

Many entrepreneurs opt for a private limited company (BV), partly because of the limited liability it offers. However, even with a BV, bankruptcy can have serious financial consequences, such as the loss of profits accumulated over many years or business premises. An effective strategy for minimising these risks is to set up a holding company structure.

A holding structure is an indispensable component of any business. As the saying goes: a single limited company is not a limited company. Yet many entrepreneurs fail to set up this structure, or are simply unaware of it. In this article, we explain what is a holding structure, we highlight the tax and legal benefits of a holding company structure and explain why it is essential in the event of a potential sale.

Benefits of a holding company structure

Risk diversification

By transferring valuable assets to the holding company, these are protected against risks and debts that may arise in the operating companies. In the event of bankruptcy, the holding company normally remains beyond the reach of creditors. This is not the case if there is a fiscal unity, if financing is secured for which all private limited companies are liable, or if a so-called Section 403 declaration is filed.

Tax benefits of holding company

A holding company structure also offers various tax benefits. Thanks to the tax consolidation between the holding company and the operating company or companies, profits and losses can be offset internally, thereby reducing the tax liability.

Tax benefits of holding company can also be achieved without forming a fiscal unity. Without a fiscal unity, each private limited company is liable for tax in its own right, meaning that each individual company can benefit from the reduced corporation tax rate of 19% on taxable profits up to €200,000. A rate of 25.8% applies to any amount in excess of this.

Furthermore, the participation exemption allows profits to be distributed tax-free as dividends from the operating company to the holding company. This exemption applies as soon as the holding company holds at least 5% of the shares in the operating company, thereby constituting a ‘participation’ that qualifies for this exemption.

The profits distributed by the operating company to the holding company can be reinvested, but may also be used for private purposes. One example is taking out a mortgage loan for your own private use through the holding company. The advantage of this is that, unlike with a dividend payment to a private individual, you pay neither dividend tax nor income tax on this loan. In addition, you pay interest on the loan to your own holding company rather than to the bank. Furthermore, a so-called owner-occupied home loan is exempt from the Excessive Borrowing Act. A condition for this is that a mortgage is registered on the property (by notarial deed) in favour of the private limited company. Furthermore, this exemption does not apply to holiday homes or investment properties.

The Excessive Borrowing from a Company Act sets a limit of €500,000 (as of 1 January 2024) on the amount you are permitted to borrow privately from your private limited company. All debts are included in this calculation, with the exception of mortgage debts. Any amount exceeding this limit is taxed as (notional) income from a substantial interest (box 2).

[1] Belastingdienst – Restrictions on excessive borrowing from private limited companies from 2023

Selling the business

When selling shares in the operating company, a holding company structure is of crucial importance. Thanks to the participation exemption, the holding company pays no tax on the capital gain on these shares included in the sale price. If the shares in the operating entity are held by a natural person, the difference between the disposal price and the original acquisition cost of the shareholding is treated as profit from a substantial interest for that natural person for income tax purposes (box 2).

You pay 24.50% tax on income from a substantial interest up to €67,000. You pay 33% tax on income from a substantial interest above €67,000.

Disadvantages of a holding company structure

A holding company structure offers not only (tax) advantages, but also disadvantages. The disadvantages of a holding company structure include higher initial set-up costs and more complex and costly administration. Furthermore, in the event of serious mismanagement and/or fraud, the protection against liability may be breached.

When should you set up a holding company structure?

Ideally, the holding structure should be established right from the start of the business. If this was not done at the time of incorporation, a share merger may be a suitable option for establishing a holding structure at a later stage. In a share merger, you, as a natural person, transfer your shares in a company (the operating company) to another company (the holding company) in exchange for shares in the holding company. Thanks to the share merger facility provided for in the law, no profit needs to be recognised on the capital gain arising from the shares being disposed of.

As a result, a share merger is more advantageous than a standard share transfer, where the capital gain on the shares is taxed at Box 2 rates. However, this facility does not apply if the merger is primarily aimed at avoiding or deferring taxation. It is therefore important to set up a corporate structure in good time to avoid undesirable tax implications.

Conclusion

Setting up a holding company structure offers significant asset protection and tax benefits for entrepreneurs. By safeguarding valuable assets against business risks and enhancing tax efficiency, a holding company structure is a strategic choice for any entrepreneur. It is therefore crucial to establish this structure in good time, ideally when you first set up your business, in order to maximise the benefits.

A holding structure is one of the key elements you need to have in place before selling your business. Are you wondering whether your business is ready to be sold? Complete our ‘Is my company ready to be sold?’ tool and receive a free advisory report!