What are holding companies? Understanding Parent and Subsidiary corporate relationship

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Have you ever thought who owns the Starbucks franchise in the Philippines?
Rustan Coffee which is a subsidiary of Rustan Group owns Starbucks Philippines(need clarification here) which  is the franchisee of Starbucks in the Philippines.

If you look at the relationship between these companies one can clearly see which stands as the parent and which stands as the subsidiary. By definition a subsidiary is a corporation which is controlled by another company while a parent company is a corporation who has control over another company. 


The important term to remember is “control”. What is control then?

Basically control is defined as having an influence over another. So in a corporate setting control is achieved if one company owns a majority share in a company thus giving such company the power to make decisions due to the majority voting rights.

The Philippine Stock Exchange have an index named Holding Firms. This index primarily have all the conglomerate that has shareholdings in businesses of various industry. 
To name a few the likes of JGS(JG Summit) of the Gokingwei’s, AC(Ayala Corp.) of the Ayala’s, SM(SM Investments) of the Sy’s, LPZ(Lopez Group) of the Lopez’s, and MPI(Metro Pacific Investments) of Manny V. Pangilinan of First Pacific are the known holding firms in the Philippines.
It is possible that a Parent/Holding Company is also a subsidiary of another company. In this case such company will be called the ultimate  parent company.  An ultimate parent company may be a domestic corporation or a foreign corporation. 

In that case the Parent corporation prepares its Financial report with two presentation that is as the corporation by itself and as consolidated report.(This topic will be discuss in another post).

Now why does one need to know such?

This is important because it gives an idea how a stock will be performing. So basically since the earnings of a parent company comes from its subsidiary one can gauge the value of a holding company through its subsidiary. 
An example is AC(Ayala Corp) with the good performance of BPI(Bank of the Philippine  Island) one might think that it is good to buy AC(which is good because AC is considered as a fundamentally sound corporation) but looking at its telecom business GLO(Globe Inc.) which has suffered set back in its operations due to the sluggish telecom industry one might concentrate more on BPI rather than investing its bulk of funds in AC.
At the same time it is also noteworthy to know that though such is interconnected it seems that the subsidiary and the parent are independent from one another.

So one still has to understand the nature of the company and the industry they are in. And it would be of great help knowing the diversified business a company ventures into.
 
Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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35 comments for “What are holding companies? Understanding Parent and Subsidiary corporate relationship

  1. Leo
    August 23, 2014 at 12:52 pm

    Dear sir, I have stumbled across your article in my readings and have found it very interesting which raises a few questions, I hope you’ll have time to share your knowledge on this whenever free:
    1. If your family has a close corporation, can you (1 of the family members) create or establish a “subsidiary”?
    2. Will this mean the subsidiary will also need the same articles of incorporation as required when the parent corp was established along with SEC paid up capitals etc.?
    3. Will the subsidiary be automatically categorized as a corporation or can it be a ‘sole proprietorship’ or partnership type (partner is 1 of the incorporators/stakeholders of the parent corporarion? (This one doesn’t make much sense but perhaps my lack of knowledge in technicalities are limiting my abilities to expound further sorry)

    Thank you in advanced!

    • August 24, 2014 at 4:45 pm

      Wow! I so love your question Leo. But again I would like to clarify I am not a tax expert and a law expert so whatever I dispense is purely what I know as far as corporation law is concern.

      Let’s first tackle Close Corporation. The technical definition of a close corporation is that the outstanding shares are only held by I think 20 or lesser shareholders. So mostly family corporations are the number one closed corporation. A corporation becomes a subsidiary(technically and as far as I know) when the ability to make decisions and vote on decision is held by another corporation thus establishing a parent-subsidiary relationship between the two entities.

      Now to answer your questions: Can a shareholder(in your case family member) established a subsidiary of the closed corporation?

      The answer would depend if the established corporation’s power to decide is controlled by the close corporation by way which is evidenced by the number of votes it can have in making a decision in the board meeting. Remember that the evidence to established a majority power to vote or effect a decision is through the number of shareholding rather than one member of the family being a shareholder of the supposed to be subsidiary.

      Before I answer the no.2 question lets clarify first when a corporation is established. In order for a corporation to have juridical existence(accepted as fact as far as legal things are concern) at least 5 natural person incorporators have to form the corporation. Thus each corporation is a separate entity even from its incorporators because a corporation is a juridical person meaning a person by operation law.The corporation will have separate Articles of incorporation and separate paid it capital.

      Now to answer your question it may look like it is a redundant and a repetitive work but as I have mentioned the subsidiary is a separate entity thus it has a different articles of incorporation but it could have the same details as the parent. The paid up capital may be just transfer from the parent company but it is still recorded as a separate paid up capital thus what would happen is the parent would record an invetsment in the subsidiary company thereby making the parent corporation a shareholder of the subsidiary. As I have mentioned in order to form a corporation at least 5 natural persons will incorporate it. So when would the parent have shareholding? that happens after the corporation is established and the parent invests in the subsidiary which will be be represented by one of the shareholders of the parent thereby shareholders of the parent and the subsidiary could just be the same people but still the tow corporations are always separate entities.

      In your your third question I guess you are confusing yourself as to what organizational type is the “Other business” the parent company will invest into. Again in order for a business to be considered as corporation it needs to be established as one needing 5 incorporators. Kung ung binangit mo an subsidiary is just an ordinary business like a grocery store, a water refilling station, a kindergarden school, etc. which are funded by the close corporation I would look at them as the close corporation’s investment rather than subsidiary thus sa business registration it should be under the name of the closed corporation only doing business as it could be another name like if one of the shareholder runs the grocery store the name could be family member no.1 Grocery store but the actual owner of the business is the closed corporation.

      Now can the corporation consider a partnership as a subsidiary? Syempre kasi as a juridical person it can now engage in business. Now sa story ng sole proprietorship and tanong sino ba ang may ari ng business? YUng closed corporation or yung family member? In the case of sole proprietor hindi sya pwedeng isama as subsidiary.

      Besides subsidiary we also call other business that the corporation might have stake or investment but have no majority vote as to effect decision making as affiliates.

      Wheeew! Pinawisan ako dun Leo ah hehehehe! Thank you for that question. It is a very good question. For our lawyer friends and fellow advocates here and CPAs as well kindly lend us your opinions and clarifications. Many heads that are align and thinking alike are better than one 🙂

      • Leo
        August 24, 2014 at 5:24 pm

        This certainly made sense, my utmost thanks and appreciation for taking time to expound on the scatter brain of a question I had, inching closer now towards which direction I need to be heading. 🙂

  2. November 3, 2014 at 5:50 pm

    Very informative! Thank you!

  3. May 9, 2015 at 9:57 pm

    Hi,
    Family and friends are planning to pool money and start investing and we are thinking setting up a holding company.
    My questions are:
    1. What are the ways for the holding company to make money if we decided to form a new company with 100% ownership?
    2. is it legal that the incorporator/s of the holding company also the director of the subsidiaries to be set up?

    Thanks in advance!

    • May 10, 2015 at 8:51 pm

      Hi Albert,

      For your questions

      1. Holding company earns from its investments through dividends and profit sharing schemes and at times indirectly through transfer pricing in between companies held.

      2. There is nothing wrong if the same incorporators/directors are both the same for the holding company and its subsidiaries. Though at times it might be challenge that the holding company and the subsidiary is one and the same which as I remember is termed percing the veil of corporate entity(I am not quit sure about this but better asks a corporate lawyer who has a wide knowledge in setting up family corporations).

      Disclaimer: Should you need detailed and wider scope in regards to your questions I suggest you seek the services of a corporate lawyer who can better setup your companies so that you dont violate any of the provisions of the COrporate laws and other laws that has authority over juridical entities such as corporations. It is common to establish a holding company to manage the investment rather than running the business itself. Having a subsidiary to run a portion of the entire business helps it focus on its core rather than having to worry of fund management and other lines of businesses.

      I hope this helps Albert.

  4. Bern
    May 28, 2015 at 2:28 pm

    hi. if one corporation decides to become a holding company of another, will that minimize taxes upon the latter if in case it expands the business? i.e. open a few more stores/branches?

    • May 28, 2015 at 10:56 pm

      Hi Bern,

      To answer your question, my answer is not necessarily. Each company still pays its own tax so to maximize savings on tax liabilities, holding company should carefully plan its tax payments. Holding companies will usually have small operating cost since they act as investing unit for the group. At times MNC(Multinational Companies) set up their holding company in a country where there is small corporate income tax to take advantage of tax savings and set up their operations unit in countries where labor is cheaper.At the end of the day the tax man does not tax you base on how many stores or branches a company has but rather taxbase on the taxable income it has.

  5. Elaine
    August 31, 2015 at 1:59 am

    Hi sir 🙂 We have a project to get a copy of a consolidated statements of financial position, but most of them does not want to give us a copy because it is confidential. Could you recommend a parent company that I could go to, for me to get a copy.

  6. irene
    October 2, 2015 at 9:52 am

    Hi Sir,

    We are thinking of putting up business corporations with different line of business.
    Is putting this different business in one holding company possible?
    Do we have to register each of this business or is it acceptable to put this in one business organization
    in what we walled holding company?

    Please enlighten me as I have a minimal knowledge of this kind.

    • October 5, 2015 at 11:47 pm

      Hi Irene,

      Each business is separate from the other but all can be under one holding company.And since these are separate businesses they should be registered business. Setting up one business organization and having separate business does not make the registered business the holding company. Holding companies act as if they own part of the business. The best example we have in the Philippines is SMC(San Miguel Corp) under SMC is the Purefoods corporation. Petron COrporation, San Miguel Beer(SMB), Sual Power Plant, and others(go to http://www.sanmiguel.com.ph/business.html).

      Now if you are that the example is quite big let set a small example. A group of friends pooled their savinsg and created ABC Partnership and they invested in a small franchise. SO there is one business(the franchise) owned by the partnership(the business org). IN the course of time the franchise grew and generated income so the partnership decided to buy other frnachise and also have it in difererent towns and cities. To do that they have to register each franchie in each town or Citybut still under one business org the partnership. In my example a single business org may have diffferent business which maybe related or unrelated but still it is not a holding company. NOt what if the partnership became bigger and in the process bought a portion of their competitor? now the partnership could be an affiliate company in this situation unless their control increases in the competitor company. If after sometime still the partneship growa, but more 50% of the competitor company(now they have control), and also invested in another business with a very different line of business form theirs like gravel and sand business, or they decided to buy and run a resort etc. Now there is a potential that the partnership is now a holding company and that is if the partnership has control over these businesses. If so then we can say that the partnehsip now is a holding company having control on the franchise(their original business), a portion of the competitor(yup this is very possible in the business world), the gravel and sand business, and the resort they bought and now running.

      Hope this helps Irene

      • irene
        October 6, 2015 at 8:31 am

        Thank you so much. This help me a lot.

  7. Anne
    February 16, 2016 at 2:03 pm

    Hi Sir, as per your reply your not a tax expert nor law expert but I’m very positive that you can answer my questions more than an expert. The companies I work with are closed corporations and they are planning to create a holding company and one of their concern is the consolidation, does SEC or BIR requires for a consolidation of financial statements of all companies owned by the holding company, either wholly owned or partially owned? Which is better, a holding company that also owns a real property or just purely shares of stocks from different companies? If a holding company is audited by BIR or by Municipal or City, is there a possibility that all companies owned by this holding company will also be subject for audit? Is there any tax benefits for a holding company, divided received by the holding company is exempt from tax but if holding company issue divided to individual shareholders, will it be subject to tax?

    • February 18, 2016 at 8:12 am

      Hi Anne,

      Apologize for the late response. Been busy at work and also I need to research to answer your question. Again as I have stated I am not a tax expert nor a tax lawyer 😉 so the answer I can give you is only in a general level. I will answer your queries once I get the info I need from the internet. Again my apologies.

    • February 19, 2016 at 1:18 pm

      Hi Anne,

      So far this is what I can give for your queries…

      1. Does is SEC & BIR require consolidated FS?

      I am actually looking for any regulation or memo that says so that it is required to submit/file a consolidated
      FS for holding companies but I haven’t found any yet. But I believe since we are following the IFRS(adopted as PFRS), auditors would require
      a consolidated FS and thus the same will be submitted to BIR/SEC.I will update you on this once I found a revenue regualtion and a SEC memo.

      2. Which is better holding company with assest or purely stock ownership?
      – personally, most holding companies will have real assets and stocks. So a holding compnay might have a 10 floor building where the office is but still most of its assets will surely be the
      stocks of the companies they own. But in a true sense I would rather have stocks as the asset of a holding company since that would be lesser to worry about like municipal/city taxes on the property and other maintenance cost.

      3. Will subsidiary be subjected as well to audit?
      – the subsidiary is still look at as a business entity having separate person from its holding compnay so even if the holding company is audited, the subsidiaries will be audited as well by the BIR or the municipal/city government to which it is under.
      We have this “Substance over form” rules though so as far as we are concern by “form” the holding and the subsidiaries are separate entities.

      4. Tax benefit of holding company, dividend to individual subject to tax?
      Yes the benefit of the holding company tax wise is the no tax on dividends between domestic companies. As to dividend given to individuals the rule does not apply even if the individual thus if a stockholder of the holding compnay receives dividiend, the holding company has to deduct the tax and remit it to the BIR.

  8. Anj
    August 18, 2016 at 7:00 am

    Hi Leo,

    I’m still in the dark on how the stocks and corporate stuff work. But my question is (or are): can I actually start up a holding company without having a sole operating company? How much will be the estimated cost? Can a holding company own some shares from other big companies, like that of JK Summit or whichever? I will greatly appreciate your response in the future. Thanks!

    • Anj
      August 18, 2016 at 10:57 am

      Woops! My apologies! I just noticed I’d called you on diff name 😲😲😲 sorry for that! (╥_╥)

    • August 22, 2016 at 5:24 pm

      Hi Anj,

      No worries. To answer your queries:
      1. You can actually start a holding company without any operating company. Your company will be an investment company since you will have shares of stocks of other companies.
      2. For the cost you need to comply with SEC requirements. Check it in http://www.sec.gov.ph and the amount is quite big 🙂
      3. Yes a holding company can have shares of another holding compnay like JG Summit.

      Hope this answres your queries Anj.

  9. Aireen Ecotan
    September 7, 2016 at 12:37 pm

    Hi Leo,

    My husband and I owns several corporations and two sole prop. Now, would it be advantageous to us to form a holding company? A CPA friend said that a holdings company can help us in our taxes. Can you clarify the advantages and disadvantages of having a holdings company?

    Thank you very much!

    • September 27, 2016 at 10:24 pm

      Hi Aireen,

      First of all I am not a BIR Accredited Tax Agent so my opinions are based on so far what I know. It is said that creating a holding company for several business owned will help in your tax obligations as long as you have the control over those business. By control it means you make the decisions in the board of the company due to your big shareholding thus such company is reported in your consolidated financial statements. What I read so far is that if you dont have control over a company you have to file the tax of such separately thus tax obligations could arise while having a holding company, the net income and net loss on each company controlled are consolidated and only the holding company has obligation.

      If you compare it with individual companies, if one company is net loss you cannot offset it to the other companies that has net income.But if you have a holding company which has control over several companies, such net income or net loss of each company held are consolidated thus you are able to take advantage of lowering your total income.

      Again this is what I know so far, tax laws are being change so not sure what is the situation now.

      I hope this helped Aireen.

  10. Hya
    September 28, 2016 at 3:33 pm

    Hi Louis,

    I find your website very informative and thank you for sharing your knowledge with us.

    I would like to get your opinion or expert advice on certain matters regarding putting up a business.
    It’s my first time to start a business venture and I have some questions.

    1. I’m an OFW and therefore I’m tax exempt but if I establish a business in the Phils (sole or corp) what ever income I would have in that business will be taxable. My understanding is that only income from the business will be taxable. Is my understanding correct?

    2. If I establish a corporation with authorized capital of 1,000,000. As per my understanding, the subscribed capital should be minimum of 25% (250,000) and the paid up capital should be minimum of 25% (62,500) as well. Is there a prescribed deadline for us to pay the remaining subscribed shares? Same goes with the authorized capital.

    I’m not so knowledgeable on corporate code/law, your valuable inputs is highly appreciated.

    Thanks so much and more power to you.

    Hya

    • September 29, 2016 at 3:50 pm

      Hi Hya,

      Thank you for the continued support and believing in my blog.

      To answer your questions:

      1. As long as you are an OFW and your salary comes from abroad, only income within the Philippines is taxable. This is what we call non-resident citizens where only income earn within the Philippines is taxable.

      2. The Corporate Law mentions the minimum requirement which is subscribed capital should be 25% of authorized capital stock and of the subscribed capital stock 25% should be paid up and should not be less than Php5,000.00. This is the minimum thus there is no deadline for the remaining in order for you to register your corporation in SEC. Of course, there are some other requirements depending on what type of business the corporation is engage to. Like if you establishing an investment corporation which require a higher capitalization.(you can check the required capitalization in SEC’s website).

      I hope this answers your questions Hya.

      Should you need further clarification, please look for a BIR and SEC accredited CPA.

      • Hya
        September 29, 2016 at 10:54 pm

        Thank you Louis, appreciate your response.

  11. Ces
    July 28, 2017 at 9:13 am

    Good day, Sir!

    I find your article very informative and really helpful. If you may help me about my inquiry regarding on how to become a holding company here in the Philippines it would be really much appreciated. I’d like to know if you have idea about the process and if I need to submit any requirements to SEC, BIR or any other gov’t agencies before becoming a holding company.

    To start with, Company A is in business of recycling scrap materials. Also, we have Company B here with same line of business as Company A but Company B is much smaller company compare to Company A. Another one is Company C where it sells products that can still be use from scrap materials of Company A and B to end users or consumers.

    Now here’s my concern, how will Company A acquire Company B and Company C so that Company A will become the parent company of Company B and Company C and the latter will become its subsidiaries.

    I hope I made myself clear. Thank you very much in advance and God Bless to you sir!

    • July 28, 2017 at 4:47 pm

      Hi Ces,

      Definitely you need to go to SEC, BIR, etc to create a holding company. Check out SEC’s site for more guidance(http://www.sec.gov.ph/forms-and-fees/schedule-of-fees/#). Technically a holding company does not opearte a business but rather the holding company has a controlling interest on its subsidiaries. So in your example Company A should buy a significant ownership on Company B & C so that Company A would be the holding company. While on that, Company A could transfer the recycling Scrap business to Company B thus making itself fully stockholders of the two subsidiaries.

      Hope this helps Ces.

      • Ces
        July 29, 2017 at 4:50 pm

        My follow up question sir is, after Company A becomes holding company, it can still operate the way it used to before right? And would it be better if Company A gets a legal advisor regarding this concern?

        Thank you, Louis! More power!

        • July 30, 2017 at 12:12 am

          Hi Ces,

          Yes, Company A could still operate as it use to before even after it becomes a holding company as long a sit is written in their articles of incorporation. Now as to the need for legal advisor for making Company A a holding company is off course needed to set the right words in the articles of incorporation and other legal stuff. Unless one of the directors can act in such capacity, the need for a legal advisor(that has a wide expertise on Corporate law and business) is a must help and make sure the Company follows guidelines on such corporate transformation.

          Hope this helps Ces.

          • Ces
            July 31, 2017 at 9:24 am

            Thank you for expanding my knowledge sir and for the quick response!

  12. Ces
    July 31, 2017 at 4:31 pm

    Sir I have another question hehe

    In order for Company A to be considered a holding company it should acquire majority ownership interest which is 51%-100%, right?

    Let’s say for example, Company B has authorized capital of 4M share @ P1.00 par value. Its subscribed shares is 1.5M shares and paid-up capital is 1M shares @P1.00 pr value.

    My question now is, where will be the 51%-100% controlling interest should be base in order for Company A be called as holding company of Company B?

    Thank you sir!

    • August 1, 2017 at 6:16 pm

      Hi Ces,

      The key term is “Outstanding” and “Controlling interest”. In your example outstanding is 1 million(paid-up capital which I assume issued shares) thus in order to gain controlling interest it should have 500,001 shares but again “controlling interest” might mean owning less than 50% but have significant voting powers to influence an owned company’s decision making.

      Hope this helps Ces 🙂

      • Ces
        August 3, 2017 at 11:10 am

        Thank you, sir! Can you suggest any book sir which could help me more in understanding the process in establishing a holding co. under the Philippine Law?

        Also, if you know any book I could buy about on how to increase stocks?

        Thank you again sir 🙂

  13. Mae
    August 2, 2017 at 8:54 am

    Good Day, Sir Louis!

    I would like to get your opinion or expert advice on certain matters regarding the difference between the “Pure Holding Company” and “Operating Holding Company”. If you are in the situation, what is the best way to choose is it Pure holding Company or Operating Holding Company? Then Why?

    Thank you sir in advanced! 🙂

  14. petevicuna
    October 20, 2017 at 4:33 pm

    Good day, Sir Louis, In relation to the other inquiries above regarding a holding company, pls give some advise. Our family have a couple of small business, different in business nature and all are registered as Single Proprietorship. Now, we plan to register a Holding corporation consisting of these small businesses. In all discussions on Holding Company, I understand Subsidiary companies are also corporations, no mention of single prop or partnerships. Please give some insights in this scenario. Your opinion shall be highly appreciated. Thanks a lot.

    • November 17, 2017 at 4:25 pm

      Hi petevicuna,

      Apologies for the long delay. Yes you are correct. There are no mention of single proprietorship since there are no shares that can be bought. If you are going to put those small business under the holding company it is if the business are fully acquired by the existing company.

      I hope this helps.

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