Holding Companies - Profit and Tax

[AmithS]

Hello fellow members,

I was wondering how the profits and more especially tax works on holding type companies.

e.g. you have five companies C1, C2, C3, C4 & C5. You then have the holding company H1 which owns C1 - C5.

If C1 to C5 each makes R100 in profit. Does the profits get taxed in each company individually or on a holding company level in this example H1.

If each company gets taxed individually and you move profits to the holding company H1 ... does it get taxed again or it is exempt?

Interesting to know as this would I guess determine if you would rather keep C1 to C5 as divisions of H1 instead... which will possibly create other complexities \ risk having all the divisions as 1 company.

Love to hear from you

[Andromeda]

Hi Singhms

The individual companies are taxed on their profits, excluding dividends received.

How do you propose to "move profits" to the parent company? If in the form of dividends; they are not taxed in the holding company. If in the form of fees of some sort, then they are taxed.

Be aware that SARS will almost certainly trip you up in respect of elaborate loss transfer schemes between subsidiaries (or associates) and holding companies.

[AmithS]

Hi Andromeda,

Thanks for the reply. No hidden agenda with the idea behind transferring the profits to the holding company. More a way to cover the administration costs (salaries, offices, etc...) at the holding company level rather than at the individual companies level.

What you propose \ say would be the best to do this?

[Andromeda]

No problem you can invoice actual costs, admin fee, management fee and so on. It is always best to have the directors resolve in writing what the fees are for a year or even less and account for it in they companies where they belong.

The scenario I am referring to is when for example, The holding company, which is in a loss position, charges the subsidiary (which is in a profit position) a huge fee just to dilute the subsidiary profit and thereby reduce the tax.

[AmithS]

If you had to account for all the costs in some way or the other within the actual companies. Then would the holding company submit a nil return for tax purposes?

[Andromeda]

The test is "arms length". In other words, if the charges are similar or equivalent to what would have been levied if they were not related, then the charges are seen to be satisfying the arms length test.