There is a large range of companies you can set up in Saudi Arabia, which is why many foreign investors are interested in this country. As a result, Saudi holding companies are becoming more popular among investors since they can use them for several purposes. However, you should take some requirements, and factors into consideration before making any decision. For instance, types of holdings, activities of holding companies in Saudi Arabia, holding company registration, etc.
In this article, you will learn everything you need to know about opening a holding company in Saudi Arabia. Let us see:
- What is a holding company?
- What is the importance of holding companies?
- Why do many professionals want to open a holding company?
- What are the benefits of a holding company in Saudi Arabia?
- How is a holding company established?
- What would happen if you open a holding company in Saudi Arabia?
- How can Company Formation Saudi help you get more information about opening a holding company in Saudi Arabia?
1. What is a holding company?
It is a company that owns the majority of the shares and manages a group of companies. This structure is made up of a controlling company (holding) and a group of companies dependent on it (controlled). Likewise, this entity deals specifically with assets, investments, and management. Nevertheless, it is not in charge of the provision of goods and services with the view of making a profit.
Shares usually limit such a company. In addition, its main activities will involve the owning of assets in another company or perhaps a group of companies. Consequently, these assets could be anything, from shares to intellectual property, and real property. Holding companies may also be responsible for the supervision of others companies. Aside from these functions, a holding company will not normally trade or conduct any other activity.
How the holding company, exercises control over the management of the dominated companies is through direct and majority participation in their capital. Indeed, there is a debate in the field of holding companies. This is because of the lack of responsibility of the group as such for the actions of the dominated companies. However, it was the management of the holding company that made the decision.
Unlike its subordinates, the group of companies does not have its legal personality. However, it has the decision-making power of the other companies and, therefore, no liability.
2. What is the importance of holding companies?
Opening a company, especially a holding business, has great benefits to the extent that it manages to control important sectors of the market. Additionally, it ensures that the companies that are part of the Holding have access to raw materials, logistics, transportation, financing, etc.
An example of the benefits obtained with a holding organization is the case of a company that produces soft drinks. In this case, there is one company that produces the soft drinks, another that manufactures the containers, another that distributes the soft drinks, another that bottles the soft drinks, and another that can finance them all.
In these circumstances, strong competition cannot affect any of the companies, since they have assured suppliers as well as their clients. All the resources of the companies circulate between the Holding, and profitability does not go to different hands than to the same group.
Likewise, through a holding company, it is possible to have control of a good part of the factors and elements that are part of a productive process. In this manner, the holding business can control the extraction of the raw material, and the final placement of the product
2.1 Reduce risks
A holding corporation can control the entire chain or process of a good or service, which allows it to minimize risks and maximize profits.
In addition, the holding companies may not seek control of a market, but rather different companies are simply grouped to facilitate administration without seeking a common objective.
Some companies invest in different sectors without a common strategy. In this way, the only objective of the holding company is to integrate activities, administration, or resources.
2.2 Holding vs. monopolies
A holding company at any given time can become a monopoly, which is why they limit the development of a holding by state regulations to prevent the appearance of monopolies. Indeed, antitrust rules impose limits on large economic groups to prevent them from abusing their dominant position in the market and causing distortion in it. However, at no time is it negative for the market or for the holding organization itself, in the understanding that it will enjoy a market that develops under normal and adequate conditions, thanks to state regulations.
3. Why do many professionals want to open a holding company?
Many professionals seek to turn their business into a holding company. One of the main reasons is related to decision-making. Many companies end up being harmed by the impact of choices made by one person or a small group of people.
The holding company seeks to avoid this type of bad decision that can compromise the future of the company, but also reduce the consequences that the inevitable changes and alterations of the market can bring.
In other words, a holding structure allows for a better organization and greater stability of the company without the need to make large investments. In turn, a good organization helps to optimize the marketing of services and products. Meanwhile, it simplifies intra-company coordination of all activities.
4. What are the benefits of a holding company in Saudi Arabia?
By introducing centralized systems, the holding company can bring many benefits to the management of the organization. As a result, a holding company has an array of advantages, among which the limited liability towards its subsidiaries is the most important. Let us see:
- Conveys a solid and professional image to customers and suppliers.
- Simplifies intra-company coordination of all activities.
- Improves accounting and performance ratios, providing greater visibility into how the business is evolving and which actions have performed best.
- It reduces economic risk, providing stability without abandoning its main objective and optimizing expense management.
- It offsets the losses of one of the group companies with the profits of another during the same fiscal year. This allows a deferral of payment to the treasury. This means greater liquidity for the most affected company in the group.
- It benefits all members with tax deductions in corporation tax, as long as the specific requirements are met. In addition, it helps reduce Inheritance, gift tax, and wealth tax.
4.1 Disadvantages of a holding company
It is also crucial to stand out the disadvantages of a holding company. There are some drawbacks, mostly linked to differences of opinion such as:
- As for the organization, there may be a lack of information and communication between the companies of the group, which generates friction.
- As there is a predominant society, corporate identity can be diluted, causing difficulties in establishing a common culture.
- Some internal rivalry may appear between the different organizations that make up the holding company.
- Due to the predominant position of the parent company over the rest, the group can come to have control of a certain market, generating a monopoly.
5. How is a holding company established?
Since each case is different, it is best to do a preliminary study and have the advice of an expert.
5.1 Constitution of the holding company
The creation of the holding company is no different from the constitution of any other public limited or limited company. That is, going through the notary and the Mercantile Registry are mandatory.
During this process, each partner will make contributions in the form of goods, shares, or cash. Subsequently, all this will be valued to quantify the shareholding percentage that each of them will have over the total of the holding company.
5.2 Valid reasons justifying the creation of the holding company
Before the administration, the tax savings will not be valid as a reason to justify the constitution of the holding company. In this sense, some legal arguments will be:
- The diversification of business activity.
- Offer a unique brand image to compete in the market.
- Achieve the valid size to access public or private tenders with the highest success rate.
- Optimize the internal organization to better market services and products.
5.3 Requirements for a holding company in Saudi Arabia
Parallel to this process, the partners must demonstrate that the holding company has its independent structure. They must also provide their premises and with hired personnel. At least one person must appear as a worker.
Who promotes the holding company must own more than half of the shareholding. Therefore, if you want to take advantage of the tax consolidation regime, that ownership percentage must be 75% of each of the companies that make up the holding company.
6. What would happen if you open a holding company in Saudi Arabia?
The holding company has both business and tax advantages. Below, we explain some of the most outstanding benefits of this type of business organization:
6.1 Tax deductions in the corporation tax
All members of the holding company can benefit from specific tax deductions in the Corporation Tax. However, this does not happen when, in the absence of a holding company, the beneficiary company loses its right to be in losses.
In this way, this type of group makes it possible to comply with all the requirements and the consequent aid. Whether for investments in the cultural industry or the hiring of disabled personnel.
6.2 Advantages of an economy of scale
As we have mentioned before, the constitution of a holding company brings with it the benefits of an economy of scale. Indeed, it allows you to produce more without the need to increase capital or hire staff. This is thanks to the synergies derived from a centralized administration between all the companies. In this manner, it will allow faster decision-making, discounts on common providers, and access to a larger network of contacts.
6.3 Loss compensation
The holding company will allow the possible losses of a certain company to be offset by the one that contributes profits in that same fiscal year. As a result, this compensation enables a deferral of payment to the Public Treasury, and therefore, greater liquidity for the most affected company in the group.
6.4 Reductions in inheritance and gift tax
This reduction applies only in those cases of Mortis Causa succession, that is, the replacement of the heir in the legal position of the deceased. In such a situation, the incorporation of the value of the shares of entities that constitute an economic activity in the tax base of the tax will be reduced to 95%. This amount can be increased by 99% depending on the autonomous community where the holding company operates.
6.5 Reductions in wealth tax
As long as the required requirements are met, the shares in active entities in which the owner of the same forms part exercising management functions may be exempt from wealth tax.
7. How can Company Formation Saudi help you get more information about opening a holding company in Saudi Arabia?
We recommend taking into consideration the possibility of setting up a holding company. Based on the foregoing, it is an opportunity to provide the business structure with better organizational control, greater fiscal economy, and financial flexibility. Likewise, we have 20 years of experience, so you do not have to go through tedious processes. Company Formation Saudi will help you to achieve your goals and dreams in Saudi Arabia.
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Would you like to contact Company Formation Saudi to obtain more information about opening a holding company in Saudi Arabia? You can call us at our phone number if you need help +971 43 316 688 If you would rather use e-mail, you can contact us at contact@companyformationsaudi.com.