As a company grows, the need to organise its structure also increases. What started as a single company may eventually become several business lines, different shareholders, real estate within the company, cash surpluses, new investments or even a future family succession process.
In this context, several tools can be very useful for organising a group of companies, protecting assets or addressing other situations that may arise. One of these is the possibility of creating a corporate holding company.
However, a holding company should not be understood merely as a formula to pay less tax. Its purpose is to design a business structure that adapts to the company’s needs and has a clear economic rationale.
In this article, we explain what a holding company is, the difference between a holding company and a group of companies, when it may be advisable to create one, its main advantages and how to create a holding company step by step in Spain.
What is a holding company and how does it work?
Index of contents
A holding company is a legal entity whose main function is to hold, manage and direct shares or equity interests in other companies.
In other words, the holding company acts as the parent company of a corporate group. Instead of the shareholders participating directly in each operating company, they do so through a main company, which in turn holds shares or shares or ownership interests in the subsidiaries.
For example, a business family may have three companies:
- A company dedicated to the main business activity, such as manufacturing car parts.
- A real estate company where certain assets are located, such as machinery.
- A company created for a new business line, for example, the sale of cars.
If the shareholders participate directly in each of them, the structure may become complex. This is especially true when there are several shareholders, profits to reinvest, different risks or a future succession process to plan.
Through a holding structure, the shareholders participate in a parent company, and that holding company participates in the other companies within the group.
A holding company can operate in two main ways:
- Passive holding company: it is limited to holding shares or shares or ownership interests in other companies.
- Active holding company: in addition to holding shares or equity interests, it participates in the management, administration, financing or coordination of the group companies.
This distinction is important because not all holding companies have the same function or the same tax treatment.
Therefore, a holding company is not a structure reserved only for large corporations. It may also be useful for SMEs, corporate groups and family businesses that have grown or expect to grow in the coming years.
Holding company vs group of companies: what is the difference?
Although they are often used as similar concepts, a holding company and a group of companies are not the same.
- A holding company is a specific company: the parent or head company that holds shares or equity interests in other companies.
- A group of companies, on the other hand, is a broader reality. It is a set of companies that are connected through control, dependence or common management.
Therefore, a group of companies may exist without a holding company having been formally designed. For example, an individual may be the majority shareholder of several independent companies. In that case, there may be a joint business reality, but not necessarily a parent company centralising the shares or shares or ownership interests.
The holding company appears when a company is created or used to sit above the others and act as the parent company of the group.
| Concept | What it means | Example |
|---|---|---|
| Holding company | Parent company that holds and manages shares or equity interests in other companies. | An SL holds equity interests in three operating companies and centralises the management of the group. |
| Group of companies | Set of companies under common direct or indirect control. | A parent company controls several dependent companies. |
This difference is important because creating a holding company does not simply mean having several companies. It means organising the ownership and control structure through a parent company that has a specific function within the group.
When should you create a holding company in Spain?
The best time to create a holding company is when the company’s current structure no longer responds to its needs. For example, this may happen when a family business or corporate group has grown. In these cases, the holding company can help organise what already exists and prepare for what may come next.
In addition, there are many other reasons. Some examples are set out below.
1. When there are several companies without a clear structure
This is one of the most common situations: entrepreneurs or business families that participate directly in several companies.
For example:
- One company provides services.
- A second company carries out an industrial activity.
- Another company owns real estate.
- Finally, another company has been created for a new business line.
If all of them depend directly on the individual shareholders, it may be difficult to make group-level decisions, move resources between companies or prepare for the entry of investors.
2. When there are profits to be reinvested
Many companies generate profits that their shareholders do not want to withdraw for personal use but rather reinvest in other business projects.
Without a holding company, distributing dividends to an individual may generate immediate taxation under the shareholder’s Personal Income Tax. However, when a holding company exists, the exemption provided for under Spanish Corporate Income Tax regulations may apply, provided that the legal requirements are met.
This can facilitate reinvestment within the group. However, it should not be confused with a complete elimination of taxation. When the money eventually reaches the individual, the corresponding tax treatment will need to be analysed.
3. When the aim is to protect business assets
Another common situation is the existence of valuable assets within companies that carry out an activity involving operational risk.
For example, a company carrying out a commercial activity may also own real estate, machinery, financial investments or accumulated cash.
If all these assets are held within the same operating company, they may be more exposed to risks arising from the activity: debts, litigation, defaults, contractual liability or financial difficulties.
A holding structure combined where appropriate with other restructuring operations, can help separate strategic assets from ordinary business activity.
4. When a family succession process is being prepared
In family businesses, a holding company can facilitate the gradual entry of children or successors into the business structure. Instead of transferring scattered shares or ownership interests in several companies, family participation can be organised through a holding company.
This makes it possible to regulate more effectively:
- Who participates in the group.
- What economic and political rights each member has.
- How decisions are made.
- What happens if a family member wants to leave.
- How shares or equity interests are transferred.
- How business continuity is protected.
In these cases, the holding company is usually complemented by a family protocol and shareholders’ agreements adapted to the reality of the business family.
5. When the company expects to sell a company or bring in investors
If a company is preparing for a future sale, the entry of investors or a corporate transaction, the corporate structure matters a great deal.
A holding company can facilitate the sale of a subsidiary, the entry of a shareholder into a specific business line or the prior separation of assets that are not part of the transaction.
It can also help the group present a clearer structure to banks, funds, buyers, industrial partners or investors.
6. When the aim is to professionalise decision-making
In corporate groups that have grown without a clear structure, there may be duplications, shareholder conflicts or decisions that are made in a poorly organised way.
The holding company can act as the group’s decision-making centre. This allows the group to establish governing bodies, reporting criteria, intra-group contracts and control procedures.
This does not only bring order. It also helps make better business decisions.
Main advantages of a holding company
Creating a holding company can provide different advantages when there is a business structure that needs to be organised or prepared for growth. The main advantages include:
- Organising the corporate group by centralising the shares or equity interests of different companies under a parent company.
- Separating activities and risks by distinguishing between operating companies, asset-holding companies or new business lines.
- Facilitating the reinvestment of profits, allowing resources generated by some companies to be allocated to new projects within the group.
- Protecting business assets by preventing certain assets from being directly exposed to the risks of ordinary activity.
- Improving decision-making through a clearer, more organised structure focused on the joint management of the group.
- Preparing succession in family businesses by facilitating the orderly transfer of shares or shares or ownership interests and business continuity.
- Facilitating the entry of investors or a future sale by separating companies, assets or business lines more efficiently.
- Optimising the tax and corporate structure, provided that the transaction responds to valid economic reasons and meets the applicable legal requirements.
In any case, these advantages are not automatic. For a holding company to function properly, it must be designed based on a prior analysis of the business structure, the shareholders’ objectives and the tax, commercial and asset-related implications of the transaction. For this reason, expert advisory support is essential.
Types of holding company according to their function
Not all holding companies have the same objective. The structure must be adapted to the reality of each company, its shareholders and its growth plans.
Below, we look at the most common types of holding company.
Asset-holding company
An asset-holding company is used to organise the ownership of certain assets or shares. It may make sense when there are accumulated business assets, real estate, financial investments or shares in companies that the shareholders want to separate from the operating activity.
However, this type of structure requires special care because it is not enough to create a company that owns assets. It is necessary to analyse which assets it holds, what activity it carries out, what resources it uses and what tax effects it may have.
In the case of companies with real estate, the analysis must be even more careful, especially where there is rental of real estate.
Corporate holding company
A corporate holding company is the parent company that groups together shares or equity interests in operating companies. Its purpose is usually to organise the group, manage subsidiaries, coordinate strategic decisions, centralise resources and facilitate the reinvestment of profits.
This is the most common structure when there are several companies carrying out different activities or business lines. For example, an industrial company, a legal entity, a services company and so on. The corporate holding company can help all entities operate under a common strategy.
Family holding company
A family holding company is used in family businesses to organise ownership and facilitate generational continuity.
It is especially useful when several family members participate in different companies or when the aim is to prepare the entry of the next generation.
In these cases, the holding company should not be designed in isolation. It is advisable to coordinate it with a family protocol and proper succession planning.
Pure holding company and mixed holding company
A distinction is also usually made between a pure holding company and a mixed holding company:
- A pure holding company is mainly limited to holding shares or equity interests. Its function is more passive.
- A mixed holding company, on the other hand, in addition to holding shares or equity interests, provides services to its subsidiaries or is actively involved in the management of the group.
This distinction may have an impact on VAT, deductibility of expenses, material and human resources, documentation of related-party transactions and the economic justification of the structure.
How to create a holding company in Spain step by step
Creating a holding company in Spain requires planning. It is not simply a matter of incorporating a company and contributing shares or shares or ownership interests. Before carrying out the transaction, it is necessary to analyse the current structure, the shareholders’ objectives, the tax implications, the commercial situation of each company and the future functioning of the group.
Below, we review the main steps.
1. Prior analysis of the business structure
The first step is to study the current situation. Before creating a holding company, it is advisable to answer questions such as:
- How many companies are there?
- Who are the shareholders of each company?
- What percentage does each shareholder hold?
- Are there minority shareholders?
This analysis is key because the same structure does not work for every group.
Creating a holding company to reinvest profits is not the same as doing so to prepare a sale, protect real estate assets, organise a family business or separate activities with different risks.
In addition, the transaction must be supported by valid business reasons. If the main purpose is to obtain a tax advantage without a real business reason, risks may arise before the Spanish Tax Agency.
2. Design of the holding company
Once the initial situation and structure have been analysed, the target structure is designed. This is where key points are defined, such as which company will be the holding company, which companies will be placed underneath it, which shareholders will participate in the parent company and what percentage each will hold.
At this stage, different alternatives are assessed:
- Creating a new holding company to design a clean structure from scratch.
- Using an existing company when there is already a suitable company to perform that function.
- Creating an acquisition company for business purchase transactions or entry into new businesses.
The choice will depend on the objective of the transaction, the shareholder structure, taxation, costs and the situation of each company.
3. Incorporation of the holding company
If the decision is made to create a new company, the usual approach is to incorporate a limited liability company or a public limited company, depending on the size, shareholders and objectives of the group. In many cases, a limited liability company is used because of its flexibility and ease of management.
Incorporation requires the usual formalities:
- Application for the company name certificate.
- Drafting of the articles of association.
- Opening of a bank account, where applicable.
- Execution of the public deed before a notary.
- Obtaining the Spanish tax identification number (NIF).
- Registration with the Commercial Registry.
- Tax census registration and fulfilment of the corresponding tax obligations.
The articles of association should properly define the corporate purpose and provide for matters relevant to the future functioning of the holding company, such as the management and administration of shares or shares or ownership interests and the dividend policy.
4. Contribution of shares or equity interests and share-for-share exchange
Once the structure has been defined, the next step is usually to transfer the shares or equity interests of the operating companies to the holding company.
In practice, this means that the shareholders stop participating directly in each subsidiary and start doing so through the holding company, which becomes the parent company of the group.
This transaction can be structured in different ways, depending on the case:
- Non-cash contribution of shares or shares or ownership interests
- Share-for-share exchange.
- Capital increase through contribution of shares or equity interests.
- Purchase and sale of shares or shares or ownership interests.
- Combination with other restructuring operations.
The choice of one route or another will depend on the corporate structure, the ownership percentages, the valuation of the companies and the tax and commercial objectives of the transaction.
In any case, this phase must be analysed with special care, as it may have relevant implications for Corporate Income Tax, each shareholder’s position and the application, where appropriate, of the tax neutrality regime.
5. Application of the tax neutrality regime
One of the most relevant issues when creating a holding company is whether the transaction can benefit from the tax neutrality regime.
This regime does not mean that the transaction “will never be taxed”. What it allows, in certain cases, is the deferral of taxation on the income that would arise from the transaction, provided that the legal requirements are met.
The key is that the transaction must have valid economic reasons.
Although the tax neutrality regime may apply to certain restructuring operations, it should not be understood as an automatic way to achieve tax savings.
The transaction must have a real economic purpose and must be properly documented. If the Spanish Tax Agency considers that the structure has been created solely to obtain a tax advantage, it may challenge the application of the regime.
6. Organisation and functioning of the group
Once the holding company has been created, an equally important phase begins making the structure work properly. Many transactions fail not at the incorporation stage, but during subsequent management.
| Area to organise | What to review after creating the holding company |
|---|---|
| Corporate governance | Governing bodies, majorities, minutes and decision-making. |
| Taxation | Dividends, related-party transactions, VAT, Corporate Income Tax and formal obligations. |
| Accounting | Reporting by company, internal consolidation, cost control and cash management. |
| Intra-group services | Contracts, invoicing, transfer pricing and justification of services. |
| Financing | Loans between companies, contributions, dividends and reinvestment. |
| Family business | Family protocol, succession and rules on the entry or exit of shareholders. |
The holding company must act as a real parent company, not as a formal structure without activity or organisation.
Example of a holding structure
To visualise what a holding structure could look like in a fictional real-life scenario, let us consider a simple example.
Imagine a family business dedicated to manufacturing car parts. Over the years, the business has grown and everything has remained within a single company. That same company carries out the industrial activity, owns the warehouse where it operates, accumulates cash and also wants to launch a new business line.
At first sight, it may seem like a normal structure. However, when all the activity, assets and growth plans are concentrated in one single company, certain limitations begin to appear.
On the one hand, business assets, such as the industrial warehouse or accumulated cash, are exposed to the risks inherent in the activity. On the other hand, it becomes more difficult to organise the reinvestment of profits, separate new business initiatives or prepare a future family succession process.
By contrast, with a holding structure, the shareholders no longer participate directly in each activity. Instead, they participate through a parent company. That holding company sits above the group and participates in the different companies created or reorganised underneath it.
In this way, the company gains order and clarity. In addition, if in the future the shareholders wanted to bring an investor into a specific business line or prepare the sale of one of the companies, the structure would be much more organised for that purpose.
That said, this is only an illustrative example. The appropriate structure will always depend on the reality of each company, its objectives and the commercial, tax and asset-related implications of the transaction.
Taxation of a holding company in Spain
Taxation is one of the most important points when creating a holding company, but it is also one of the areas that generates the most mistakes.
A holding company may offer tax advantages, but only if the legal requirements are met and if the structure responds to a real economic purpose.
Below, we review the main aspects.
Taxation of dividends
One of the best-known benefits of a holding company is the possibility of applying the exemption on dividends received from subsidiaries.
As a rule, to apply the exemption under Article 21 of the Spanish Corporate Income Tax Law, the holding company must hold a direct or indirect participation of at least 5% in the entity distributing the dividend. It must also maintain that participation for one year, or complete that period later, where applicable.
However, this exemption should not be explained as a full exemption without nuance.
The rule establishes that the amount of dividends or profit distributions and positive income derived from the transfer of shares or equity interests is reduced, for the purposes of applying the exemption, by 5% as management expenses. For this reason, in many cases, it is referred to as a practical 95% exemption.
For example, if a subsidiary distributes dividends to the holding company and the requirements of Article 21 are met, the holding company may apply the corresponding exemption. However, if the individual shareholder later withdraws that money from the holding company, the tax treatment under their Personal Income Tax must be analysed.
Exemption on the transfer of shares or equity interests
Another relevant point is the possible exemption of the positive income obtained from the transfer of shares or shares or ownership interests. This may be important when the holding company sells a subsidiary.
This possibility can facilitate the reinvestment of the amount obtained in new business projects within the group.
However, there are also limitations, especially when asset-holding entities are involved, when the shares or shares or ownership interests do not meet the requirements, or when structures have been created without a real economic purpose.
VAT deduction in holding companies
VAT deduction in holding companies requires a specific analysis because not all holding companies can deduct input VAT under the same terms.
The Spanish VAT Law establishes that the right to deduct only applies to the extent that the goods and services acquired are used in transactions that generate the right to deduction. In addition, it limits the deductibility of input VAT on goods or services that are not directly and exclusively allocated to the business or professional activity.
In practice, the difference between a pure holding company and a mixed holding company is highly relevant.
| Type of holding company | Usual VAT treatment | Precautions |
|---|---|---|
| Pure holding company | If it is limited to holding shares or equity interests, the deduction of input VAT may be limited. | The mere holding of shares or equity interests does not always constitute an economic activity for VAT purposes. |
| Mixed or active holding company | If it provides management, administration or direction services to its subsidiaries, it may have the right to deduct VAT to the corresponding extent. | There must be real services, invoicing, contracts and adequate resources. |
| Holding company with mixed activities | It may carry out transactions that give the right to deduction and others that do not. | It may be necessary to apply the pro rata rule or reasonable allocation criteria. |
Tax consolidation regime
Finally, another issue that often arises in groups with a holding company is the tax consolidation regime.
This regime allows several companies to be taxed as a tax group for Corporate Income Tax purposes, with specific rules on integration, eliminations and offsetting of tax bases. However, it does not apply automatically simply because a holding company has been created.
The Spanish Corporate Income Tax Law defines the tax group and requires, among other conditions, that the parent entity hold a direct or indirect participation of at least 75% of the share capital and most of the voting rights of the subsidiaries, with specific rules for listed entities.
Common mistakes when creating a holding company
Although creating a holding company can provide many advantages, mistakes may arise if it is not properly designed and structured. Some of the most common are:
- Creating the holding company only for tax reasons. Taxation may be an advantage, but it should not be the only reason for the transaction. There must be a real economic purpose, such as organising the group, protecting assets, facilitating succession or preparing for growth.
- Copying another company’s structure. Each group has different shareholders, percentages, assets, risks and objectives. A structure that works for one company may not be appropriate for another.
- Failing to document the economic reasons. If the transaction benefits from the tax neutrality regime, it is important to justify why it is carried out and what business purpose it pursues.
- Failing to review the articles of association or shareholders’ agreements. Before contributing shares or shares or ownership interests or reorganising companies, it is advisable to check whether there are limitations, pre-emption rights or agreements that may affect the transaction.
- Failing to organise intra-group services. If the holding company provides services to its subsidiaries, there must be contracts, invoicing, valuation criteria and real provision of those services.
- Thinking that the holding company eliminates all risks. A holding company can help separate activities and assets, but it does not, by itself, eliminate debts, guarantees, liabilities or pre-existing risks.
- Forgetting family succession. In family businesses, the holding company must be coordinated with clear rules on the entry of shareholders, transfer of shares orshares or ownership interests, decision-making and business continuity.
Conclusion: when should you create a holding company?
Creating a holding company can be a very useful decision for companies that have grown, have several companies, want to separate risks, protect assets, reinvest profits, prepare a family succession process or structure a future sale.
However, a holding company should not be approached as a standard solution or as an automatic way to reduce taxes.
The key lies in analysing the company’s real situation, designing a coherent structure, justifying the economic reasons and properly organising the subsequent functioning of the group.
A well-designed holding company can bring order, security, efficiency and strategic vision. A poorly planned holding company can generate costs, tax risks and corporate problems.
From LEIALTA’s corporate and legal department, we support family businesses, SMEs and corporate groups in corporate restructuring processes, the creation of holding companies and asset protection, combining tax, commercial, accounting and strategic analysis.
