Relation between holding company and subsidiary company is always of complex nature not only under Income Tax but under the Companies Act, 2013 as well.
Firstly, understand the meaning of this two terms, since both are companies, therefore, these are governed by the provisions of Companies Act, 2013.
A company controlled by another company is called a subsidiary company and the controlling company is called a holding company.
The word control is the prominent part which governs the relationship between the two companies.
A holding company and subsidiary company come into existence when:
- The holding company is able to control the board of directors of the subsidiary company.
- Holding company holds more than 50% of the total share capital of the subsidiary company in India.
There are so many reasons due to which, holding companies be it a public limited company or private limited company, set up their subsidiary companies in India. Few possible reasons are as follows:
- Division of business: Normally, companies which are into so many business lines set up different subsidiary companies to give them different legal structure and show profits separately.
- Tax planning: Companies sometimes, set up companies in those countries which are tax heaven such as Mauritius, Singapore, Hongkong or Cayman Island to take tax holiday.
- Compliance & Regulatory issues: When it is difficult to enable joint Venture and alliance with other parties then it would be better to incorporate private limited company as a subsidiary company.
Advantages of holding subsidiary companies:
- It is easier to transfer the shares or properties.
- To focus on each business line is easier under holding-subsidiary relationships.
- Better control and management can be implemented through structuring business in this way.
- Setting up a subsidiary in India is an effective tax planning tool.
Besides above stated reasons, sometimes companies acquire majority shares of the other companies just to earn dividend income and due to some other strategic reasons, and become the holding company to mitigate the competition in the market.