What is a holding company?
In short, a holding company is a company that owns other companies but has no operations of its own. This type of company is often the best solution for securing a company’s future.
Holding companies will typically be ApS companies. A holding company is a company that sits between you and the operating company. The holding company owns the company that creates the values and you then own the holding company.
The benefits of holding companies are many. The biggest one is that you can hold on to the liquidity of your business. That is, you can make tax-free savings by drawing the profits out of your operating company and into your holding company. This way, they are secured against any bankruptcies, lawsuits and claims that may arise in the operating company and no taxes must be paid when you transfer the money to your holding company. This secures your capital so that you can manage it as you see fit. Of course, you have to pay taxes when you withdraw money from the holding company for private purposes.
It would be best if you considered starting your holding and operating companies simultaneously. You can found both companies with “the same” share capital, as the holding company you found can then itself found the operating company with the deposited funds.
Four apparent benefits of holding companies
Benefit 1: Risk minimization
For example, if an operating company goes bankrupt, the owner can lose everything. However, this does not happen if the owner has continuously transferred profits to a holding company. In that case, only the operating company goes bankrupt and the transferred profits is safe from the operating company’s creditors.
Benefit 2: Change of ownership and generation
Suppose the company is to be sold at some point. In that case, there can be such great benefits associated with having a holding company that it can become a costly pleasure if one has not considered a holding structure well in advance.
Firstly, the holding structure provides an opportunity to slim down the operating company before divestment. This means that the new owners do not have to pay for profits saved from previous years in the operating company.
Secondly, the possibility of tax-free divestment may mean that a much smoother and less liquidity-demanding generational change can be carried out than if there is no holding company. If there is no holding company, it is the owner who sells the shares. As such, the entire profit will be taxed. On the other hand, if there is a holding company, it is the holding company that sells the shares.
Once the holding company has owned the shares for three years, they can be sold without taxation. This means that if you have established your private limited company for DKK 50,000.00, and after three years can sell it for DKK 1,050,000.00, then you do not have to pay taxes on the profit of 1 million. The money can then be saved in the holding company and reinvested or, against payment of dividend tax, paid out privately to the owner.
Benefit 3: Tax savings
A holding structure is associated with significant tax benefits. If you own your operating company through a holding company, the profit in the operating company, after payment of corporate tax of 22.0% (2017), can be transferred tax-free to the holding company. However, it is a requirement for tax-free distribution of profits that the holding company owns more than 10% of the operating company. The advantage of the construction is that the profit from the company can be saved in the holding company instead of in the operating company. Should the operating company get into financial problems, such as lack of sales, a lawsuit, or something else, then you do not risk losing previous years’ accumulated profits, as these are no longer located in the operating company.
The holding company may choose to use the distribution to save or invest in other activities, e.g. shares, real estate, etc. without having paid major taxes beforehand.
In other words, you choose when you have to pay tax and how much you want to pay.
Benefit 4: Multiple owners
The fourth advantage of a holding structure is that it provides flexibility in those situations where there are multiple owners. The owners may have different needs to withdraw money for themselves privately. However, the owners of an operating company must always agree on how much dividend is to be distributed from the operating company to the owners / holding companies. After this, the individual owners can then decide how much they want to withdraw from their respective holding companies to themselves privately. At the same time, paying dividend tax. In addition, one can transfer money from the holding company to oneself at a much lower tax rate than with ordinary income tax.
If you are married, a dividend tax is paid at 27 per cent (2017) of the first DKK 103,400.00 (2 x DKK 51,700.00) and then 42 per cent (2017) of the rest. This allows for optimizing and saving tax.
It’s never too late.
It is never too late to establish a holding structure. It is possible to establish the holding company later, typically by a tax-free exchange of shares. We are pleased to help you arrange everything connected with such an exchange. In this way, the optimal group structure for your company is ensured.
A sole proprietorship has – and can only have – one owner who must be a natural person.
However, the limitation in the ownership structure does not prevent the owner from employing employees who, to a greater or lesser extent, handle the operation of the company.
A sole proprietorship can subsequently be transformed into a public or private limited company following the rules for tax-free business transformation.
Management and authority to bind the company
The company’s proprietor has the exclusive right to make all decisions concerning the company.
The company is obligated toward third parties by the owner alone – or an employee given sufficient managerial authority either through the nature of the specific position or power of attorney.
Liability and risk
Financially, the sole proprietorship and the proprietor are one and the same, as far as the outside world is concerned.
The company’s creditors can thus direct their claims against both the company and the proprietor. In other words, both the corporate assets and the holder’s personal assets serve as security for a creditors’ possible claims.
As the company’s operation can thus have fatal, personal, financial consequences, the company form, and the risks should be carefully considered before starting up. Especially the type of business to be conducted and its inherit risks should be a focus point.
Contrary to, e.g. private limited companies and public limited companies, there is no legal requirement for company capital at start-up.
The company can thus be started up without funds being deposited at all. For the same reason and because of its inherit simplicity, the company form is also the most widespread in Denmark.
Please note that the lack of rules on initial capital are matched by the personal liability, cf. above.
Accounting and tax matters
When establishing a sole proprietorship, the holder can choose between 3 different forms of taxation:
- The personal tax rules, where the income is taxed as personal income.
- The business tax scheme, where interest expenses can be deducted from the personal income and the profit can be saved up in the company, in exchange for a preliminary tax being paid.
- The return on capital tax scheme, where some other options are made available. These alternatives provide several benefits to the corporate strategy, but in a more straightforward way.
In the event of a deficit in personally run companies, it is possible to utilize the deficit in other personal income or the spouse’s income. In this way, the taxation of other income can be reduced.
The sole proprietorship’s accounts is not be published through the Danish Business Authority, just as the sole proprietorship is not in any other way obliged to publish information about the company’s financial situation, operations, etc.
A sole proprietorship must most often – and, as a general rule – be registered for receival and payment of VAT and, in addition, may have to register matters relating to A-taxes (taxes on employees’ salary), import/export among other things. If you receive a salary from the company, you must pay both A-taxes and AM-contribution (a labour market contribution tax).
Sole proprietorships: Widely used in Denmark
The majority of the companies that are started in Denmark are, in fact, personal companies. This may be due to a unique and distinctive Danish entrepreneurial spirit, which materializes by the many entrepreneurial types throwing themselves into the dream and realizing the company they may have fantasized about for a long time. But it can also be because it is simply very straightforward to start a one-person business.
It is thus straightforward to register the company, and most people probably believe that there is no significant risk associated with running the business. If you want to start and register a sole proprietorship, then you need to:
- Go to www.virk.dk, where you must find and follow the instructions under “Start a business”
- Log in with NemID (requires a Danish social security number – CVR number)
- Choose a Sole proprietorship
- Answer the questions that appear on the page about information regarding, for example, name, address, VAT registration, payroll registration, industry code etc.
Once you have filled in the form correctly and clicked OK, you are the business owner and have made the entrepreneurial dream come true.
Most people can start their own business at short notice and without difficulty. However, there are certain exceptions. If you are unemployed and on unemployment support, you cannot. The same applies if you receive cash benefits from the municipality. Both the unemployment insurance fund and the municipality require that in order for you to receive financial support, you need to be available for the labour market. This is not the case if you use your time starting up a business. On the other hand, if you receive SU or no public support, you can, in turn, calmly set up your own business.
If you do, then, of course, you are also interested in getting paid for your hard work. You pay salary from the company to yourself, and your profit in the company corresponds to your salary before tax. Approximately one half of the company’s profits typically go to SKAT.
If you need help with your sole proprietorship, you are more than welcome to contact us.
Personally owned small business (PMV):
PMV status is an opportunity for small personally owned companies with a turnover of less than DKK 50,000.00 per year. These companies do not have a duty to register with the Danish Business Authority, but they can choose to do so and get a CVR number and thus a digital identity. It will be necessary for companies to have a CVR number in many contexts. E.g. when making certain reports to authorities or if the company needs a digital employee signature.
PMV is for the tiny businesses
A personally owned small company, PMV, must have a turnover of less than DKK 50,000.00 per year. It must be held by a person responsible for all decisions in the company and who is financially liable. The profits of a personally owned small business are taxed as personal income. The company must not have employees. It has to be a business – not a hobby business. Typically, a PMV can, e.g. be the small start-up designer, programmer, artist, craftsman, webshop or just a company in the start-up phase and may be a little uncertain about the turnover and the concept.
PMV was born as a digital company
A PMV must be created digitally, just like a one-person company. All registrations must also be done digitally (which eventually also applies to the capital companies). The personally owned small company is set up on www.virk.dk just like all other business forms.
If the business grows into a sole proprietorship
If the turnover exceeds DKK 50,000.00 annually or just a singly employee is hired, the company can no longer remain registered as a PMV. If this happens, then the company must change status and register as a sole proprietorship, with the obligations that come with it. The company can still keep its CVR number in the event of such a change.
Characteristics of PMVs:
- They have only one owner (personally owned)
- They are not liable for VAT
- They have an annual turnover that would otherwise be VAT-liable of less than DKK 50,000.00
- They have no employees and as such pay no wages
- They have neither imports nor exports from/to countries outside the EU
- They must renew their registration as PMV every three years