Holding company: pros and cons
- KVK Redactie
- 3 May 2023
- Edited 27 Feb 2023
- 4 min
- Rules and laws
Starting a holding company to arrange matters for your 'besloten vennootschap' (private limited company, bv) sounds like a good idea. A separate operating company and a management or holding company can offer security and protection. But is it always the best choice? No, because there are downsides as well. Read this article and weigh the pros and cons of the holding construction.
The purpose of a holding bv (in Dutch) is managing assets, such as shares in one or more bvs, a company building, or profit. A bv whose shares are managed by a holding company is called an operating company. If you own more than 5% of the company shares and you work for the bv, you are a director-major shareholder, abbreviated in Dutch to DGA ('directeur-groot aandeelhouder').
"Use the holding company for risky activities such as making products, giving advice and hiring staff."
Spreading the risk
One important advantage of having a holding construction is the spreading of risks. If you perform a job with the operating company and a customer is unhappy, or files a claim against you, it will only affect the operating company. It is the operating company that has done the job, after all. If the operating company goes bankrupt due to a claim, or being held liable for damages, only the operating company's assets will be lost. The assets in the holding company will be safe.
So if you have a holding and an operating company, use the operating company for any activities involving risk: making products, giving advice, doing jobs, and hiring employees. Use the holding company for managing important company assets, such as a building or machinery. You can also put the profits you make from the operating company into the holding without having to pay tax twice.
As a DGA, you have to pay yourself a salary of at least 51,000 euros (in 2023). This is called the customary salary. The customary salary applies to every bv, but if you have a holding construction, it only applies to the holding company. You have to be an employee of the holding company. The holding company rents you out to the operating company as manager. The operating company pays a management fee to the holding company for this. The holding company pays you your salary from this received management fee.
Changing the company structure
A holding construction makes it easier to transfer or sell parts of it. You do not have to sell all the parts of your company at once. For example, you can retain the company building, but sell the operating company. And perhaps you can let the company building to the buyer of the operating company.
Does your holding own at least 95% of the operating company's shares? Your holding and working companies can enter into a fiscal entity. A fiscal entity allows you to offset both companies' profits and losses. This means paying less tax.
"A holding company is more expensive and involves more administrative work."
Setting up a holding construction costs more money than setting up one bv. Your administration costs are also higher. And you have to draw up 2 annual financial statements, because you have 2 bvs.
Two bvs mean more administration. You have to keep records for both companies. Also, you need to document the transactions between your holding company and your operating company.
Other points to consider
Are you thinking about starting a holding construction? Take the following points into account.
A holding construction does not protect you from personal liability in all cases. If you have mismanaged the operating company, you can be held personally liable. Mismanagement is, for instance, if you close a deal which you know the bv cannot live up to.
If the operating company makes a profit, it has to pay corporate income tax, 'vennootschapsbelasting' in Dutch. The percentage of 'vennootschapsbelasting' the operating company has to pay is 19% over the first 200,000 euros of profit, and 25.8% on any profit above 200,000 euros.
The operating company can pay the amount of profit that is left after paying tax into the holding company. The holding company does not have to pay tax over that profit again: this is called the participation exemption or 'deelnemingsvrijstelling' (in Dutch). To make use of this exemption, at least 5% of the shares of the holding bv has to be kept inside the operating company.
Do you want to transfer the holding's profit to your private bank account? In that case the holding has to deduct 19% from these profits. That is the amount the holding will have to pay in dividend tax. You personally will have to pay income tax over the amount you transfer into your private account. The tariff is 26.9%. You are allowed to deduct the dividend tax that the holding has paid from the income tax you have to pay.
Management fee and customary salary
The holding bv and the operating company can come to a management agreement. You will be an employee in the holding bv, instead of the operating company. The holding bv pays your wages.
The holding company then 'outsources' you to the operating company and sends a bill for the so-called management fee. The holding company will have to pay 19 or 25.8% corporate income tax over this fee. If the management fee were paid to you directly as a salary, you would have to pay income tax, and the tariff could be as high as 49.5%.
How high the management fee should be is up to you. Take into account the sum you want to pay yourself out of the holding bv's finances every month. And reckon with the customary salary scheme: as mentioned, the Dutch Tax Administration has set the minimum wage for DGAs at 51,000 euros per year (in 2023).
More than one shareholder in the operating company
If you set up the operating company with a business partner, there are 2 shareholders: you and your business partner. Your private situations and spending patterns are probably not the same. If you only have the one operating company, with you and your business partner as equal shareholders, you will have to come to one decision about paying out dividends.
As an alternative, both you and your business partner can start your own holding bv to manage your shares. Your respective holdings get to decide whether the operating company should pay out the profit to the holding companies. You and your business partner can decide for yourselves whether or not to take the profits out of your own holding bv, or to leave the profits in the holding free of tax.
FAQ's about the holding bv
No. Words such as holding company, mother, proprietor or management are not mandatory in the statutory name (the name of a legal entity in the deed of incorporation) or company name (trade name). It is customary to do this. It indicates that there is a group of companies that belong together and that one company is responsible for the way of things of all those companies.
Your holding company and your operating company can have the same business address, but this is not necessary. Entrepreneurs often establish the holding company at a private address and the operating company at the address where the work takes place.
Yes. Your holding company has its own bank account. Not all banks open a bank account for a holding company. Check with the bank of your choice.
Every bv, including a holding bv, has a capital divided into shares. This must be at least €0.01 per share.
Yes. Each company has a goal description. This describes what the activities of the bv are. Most bvs have the purpose of conducting a business. This is an operating company, or work company. If owning a business premises is the sole purpose of a bv, this is called a real estate bv (onroerend goed bv). A bv with the aim of performing management activities is called a management bv. Sometimes a company has a dual purpose. For example, both a holding company objective and a management objective.