What are the benefits of a holding company structure?

Generally, for any company its holding company’s liability is limited to paying any amount not paid up on its shares in the subsidiary, even if it is a wholly owned subsidiary. By creating a group structure you are, in effect, creating a group of legally distinct companies under common management control i.e. the companies themselves are separate legal entities.

Third parties cannot establish a legal claim against the holding company for liabilities incurred by the subsidiary unless the holding company has assumed liability under contractual arrangements, such as guarantees or indemnities, or if the subsidiary has merely acted as its holding company’s agent in dealing with the third party.

Given that many emerging companies are being built upon the licensing, commercialisation and exploitation of IP assets it makes sense to keep them safe in a separate company you own. There are other reasons for adopting holding company structures such as to keep property separated from the trading business. We have helped numerous clients strategically protect their IP and separate these assets from the potential trading risks many businesses face.

How it works

In practice the assets are licensed out to the trading companies and crossed charged. This is acceptable practice which should not raise an eyebrow from HMRC providing the charging is within HMRC guidelines.

The benefits of a corporate holding company structure

There are many benefits which will depend upon the type of business we are looking at. As a guide the following points tend to be of general application.

Ringfence your IP

Keeping assets in a separate legal entity means that they can be ring-fenced from the business risks such as litigation, financial difficulties or insolvency of operating companies in the group.

If a subsidiary becomes insolvent, the insolvency practitioner cannot sell off the assets held in a different group company to maximize returns to creditors. Any buyer of the defunct subsidiary would still need to pay to the licence fee for the relevant assets to the holding company.

Retain assets in the event of a sale

Another advantage of using a group structure and with a holding company is that the owners of the parent business can retain the IP assets by keeping ownership on the sale of the rest of the business or other companies in the group structure.

This can result in the ultimate owners of the IP maintaining a valuable asset at revenue stream if it is agreed that the recently acquired company will still enter a licence agreement for the use of the IP.

Tax efficient structures – relocating IP to tax advantageous jurisdictions

If the circumstances permit, an holding company could create a tax efficient structure. If the holding company was incorporated in another jurisdiction with tax advantages, any IP related profits accrued by the holding company would be taxed in its country of incorporation. We are seeing a trend to relocate holding companies operated in off share jurisdictions which are no longer seen as so appealing to banks and investors back to the UK which is now seen as more solid and reputable. It is possible to move both holding companies and subsidiaries back to the UK and we have worked with several companies over the past year undertaking this move.

Consistency

Keeping assets in one company alleviates the risks of different rights being held in different companies. It creates a more consistent and formal outlook, and allows licensing fees or royalty fees to be recognised as an income stream for the holding company. This also ensures that any improvements or developments to the assets belong to the holding company and can be registered and exploited by it.

Balance sheet recognition

Assets can be recognised as separate assets on the holding company balance sheet and the licensing streams detailed which can be attractive to investors.

For 20 years Gannons has been creating commercial solutions for our clients. If you need assistance navigating the complex issues surrounding the creation of an IP holding company, please get in touch.