We've been working with holding companies since 2015; and can say with some conviction that yes the finance function for these can be incredibly complex. Regular book-keeping is much the same as for a regular stand alone entity but having other related companies in the mix brings the need for more diligence and process to get the numbers right.
Multiple Subsidiaries
Holding companies will have several subsidiaries operating in different jurisdictions. Coordinating and managing the finances across them required a set process that can be replicated across the board with minimal disruption. Of course the tax and compliance aspects of different places have to be taken into consideration for entities in each jurisdiction. There are also several geographies where they still don't accept reports prepared via an accounting software. There are sometimes language barriers where the financial reports prepared in English has to be converted to another language and certified by local accountants. These things should be considered when creating a centralised finance function.
Consolidation of Financial Statements
It goes without saying that holding companies need to consolidate financial statements, combining the financial results of all subsidiaries. This process involves eliminating intercompany transactions and ensuring uniform accounting policies across the group. With the amount of work involved, it makes sense to use a consolidation software where possible to make matters easier and more time effective. We usually recommend a quarterly consolidation to start with and once a proper process is in place, move to monthly summarised consolidated results.
Financing and Capital Structure Management
Holding companies need to decide on the capital structure for the group as a whole; there will be a mix of equity, debt and perhaps other forms of financing.
While the parent company is the ultimate shareholder, complexities arise when the group structure is put into place after a few of the subsidiaries are already up and running. What then happens is the subsidiaries that are operational also end up playing the role of capital raiser and manager. Moving this across from one entity to another would then involve contractual corrections such as moving shareholder or venture agreements across entities. This is also expensive.
It's always useful to consider whether you need more than one entity to manage all of the functions required to bring your product to the market. For e.g. certain countries around the have restrictions around private limited companies issuing tokens (ICO); and you will need to consider the best structure for an entity to be able to do this.
Regulatory and tax compliance
This is straightforward to understand, subsidiaries would have their own tax and compliance matters to attend to in host jurisdictions. The regulatory landscapes can be tricky to navigate especially with items like inter-company loans and payments made to related companies / parties such as Directors.
The nuances of transfer pricing (i.e. determination of arms' length pricing for related party transactions) are central to determine ahead of getting into these. A lot of times, companies thing about these aspects retrospectively which simply doesn't work due to transaction trail being present.
Some jurisdictions also require group level audited results to be presented and this can be costly and time consuming if not planned ahead of time.
Payment of dividends
Another aspect that needs careful consideration is the dividend payment policy. It's always important to have the correct paperwork in place when a parent company makes dividend payments. Generally for holding companies, it's best to pay dividends annually; either at calendar year end or at the end of the financial year end. A calendar year end is a popular choice as that corresponds with the closure of the individual tax year in many countries.
Your shareholders will have their individual tax obligations if the country of their residence has dividend tax rules. A resolution passing the dividends are mandatory in most jurisdictions as well as the necessity of supplying dividend vouchers.
The overall complexity of running a finance function for holding companies stems from the fact that there are multiple layers of entities and their corresponding compliance involved. It can quickly get out of hand if transactions are not captured accurately within a reasonable period of time.
Our experience working with holding companies are nearing a decade now, so if you have a pressing question on whether they might be right for you, pop in a quick call on our Calendly link.
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