Thanks to Saudi Arabia´s constant market changes, foreigners and other entrepreneurs can make a living off several types of businesses. Nevertheless, some foreigners do not desire to set up a company to trade, operate or sell any products or services. Instead, they might want to invest in stocks as well as hold them as well as membership interests in other companies. That is where a Saudi holding company comes into play.
In this article, we will explain to you everything you need to know about Saudi holding companies. This includes how to open a holding in Saudi Arabia as well as its advantages and such. These kinds of companies can even own companies that manufacture or conduct business and even hold real states. We will look at the following points:
- What is a holding company?
- What are the advantages and disadvantages of a Saudi holding company?
- How can you create a holding company?
- Can you convert your company to a holding company via a merger?
- How do you finance and use a holding company?
- Types of holding companies in Saudi Arabia
- How can we help you open a holding company in Saudi Arabia?
What is a holding company?
A holding company in Saudi Arabia is a corporation or parent business entity such as an LLC. These companies do not produce nor manufacture or sell any products or services nor do they conduct any business operations.
Their main interest is to hold the controlling stock and membership interests in other companies. However, unlike the parent company, if a holding company owns other companies, they do manufacture and sell products/services as well as conduct business. These types of subsidiary companies are called operating companies. On the other hand, a holding company has other subsidiaries that hold real estate, vehicles, etc. of any value that operating companies use.
To be able to control it, a Saudi holding company needs to own 100% of the subsidiary or enough stock/membership interests of the subsidiary. This means that the holding company has enough stock and membership interests to make sure that a vote of owners goes the parent company´s way. This usually needs to be 51%, although it can be lower if there are several owners.
Each of these subsidiaries needs to have its management that can run the business daily. Furthermore, the holding company is the one responsible for overseeing how its subsidiaries are run. Consequently, they can elect/remove corporate directors and managers as well as make major policy decisions like merging or dissolving. Nonetheless, the managers running the holding company do not decide on the subsidiary´s daily decision-making.
What are the benefits and challenges of a Saudi holding company?
Benefits
If you still do not know why you should create a holding in Saudi Arabia, there are many reasons. The main one is the number of advantages you can get. These are:
Liability protection
Thanks to their nature, a Saudi holding company can get liability protection. They can get this by placing their operating companies as well as their assets in separate entities. This happens because each subsidiary has its debts, and only belongs to them. This means that a creditor cannot reach a holding company´s assets or another subsidiary´s.
For instance, let us say that a holding company in Saudi Arabia has a subsidiary that is a horse farm and has debt. In this case, they are unable to pay their trainer and veterinarian. According to experts, they can only sue the assets of that subsidiary. However, they cannot sue the assets of other subsidiaries or the assets of the holding company.
The ability to control assets for less money
This is another big benefit that holding companies get. Even though a holding company controls its subsidiaries, they do not need to own all shares or membership interests. This allows the Saudi holding company to completely control another company as well as its assets at a lower cost. They are cheaper since doing it this way is cheaper than acquiring all of the subsidiary´s ownership interests or stock.
Lower debt financing costs
As for the main holding company, it can lower its debt. This is because a holding company can obtain loans with a lower interest rate than its operating companies. This is particularly true where the business that needs the capital is a startup or other ventures that they consider credit risks. However, the holding company benefits from obtaining loans and distributing funds to its subsidiaries.
Foster innovation
A Saudi holding company benefits from having less risk when investing in startups since operating companies are separate entities. This makes investing in them or other ventures less risky than others.
Lack of the need for daily management
A holding company can own businesses that operate in several industries unrelated to the holding company. This means that it does not matter whether the holding company´s owners or managers do not know those businesses. This is because since each subsidiary has its management that runs its daily operations, the holding company does not need to concern itself with it.
Challenges
Even though a Saudi holding company allows its owners to benefit in several ways, they still come with challenges. The main ones are:
Formation and ongoing compliance costs
Company registration experts in Saudi Arabia widely consider this to be the biggest challenge of this business model. Holding companies and each of their subsidiaries (including operating companies) need to pay for the formation procedure. This also includes, generally, every annual report as well as their franchise tax obligations.
Furthermore, each of these subsidiaries and the Saudi holding company needs to comply with Saudi Arabia´s governing corporation. This could also be the LLC statute as well as its documents. Nevertheless, there still are ways of going around it. If the holding company uses a single operating company it can avoid these additional compliance obligations and associated costs.
Management challenges
A Saudi holding company does not need to own all the ownership interests of its subsidiaries. As we also mentioned, this can be an advantage, but it can also be a disadvantage. If the company does not own 100% of the ownership interests, it will have to deal with minority owners. Consequently, because of this, conflicts might arise when these owners´ interests do not match the holding company´s.
On the other hand, a holding company´s management does not need to have expertise in the business of an operating company. This can be detrimental since the management of the holding company can oversee and makes major policy decisions in industries with which they are not particularly familiar.
Complexity
Complexity is another disadvantage that a Saudi holding company obtains because of the use of subsidiaries. Many experts do not find this type of complexity in a single-entity structure. This complexity comes from the fact that managing several subsidiaries can be difficult for the holding company.
Even for small companies, holding companies need to keep the records, liabilities, properties of each company, and assets separate from each other. Consequently, failure to do that task only increases the risk of the court piercing the veil. Moreover, this makes creditors able to reach assets beyond the subsidiary that has the debt.
How can you create a holding company?
If you decide to create a holding in Saudi Arabia after knowing its advantages, you need to form a legal structure. For a holding company, you need the formation of at least 2 or more business entities. According to company formation specialists, there are 4 key decisions you need to make for their formation. These are:
What entity type should you form?
In the case you need to use an LLC, a corporation or another entity type the Saudi holding company varies on some factors. Even though the first 2 options we mentioned have the advantage of limited liability, they differ in several areas. For instance, some of them are management, how to split financial interests, etc. This key factor also applies to subsidiaries.
How will the government tax the entities for federal income tax purposes?
As with the previous factor, this depends on several factors. Although, generally speaking, each of them should be a separate taxable entity or a pass-through entity.
Where should you start the formation process?
One of the several reasons why foreigners decide to open a holding in Saudi Arabia is that the company itself and its subsidiaries do not have to be formed in the same state. In other words, you can choose any state to be the formation state for the Saudi holding company. Nevertheless, when you make this decision, you need to take into consideration some aspects. For instance, each company/subsidiary must qualify if they do business in a different state than its formation state.
What name should you choose for each entity?
As with any other company formation process, the name you choose must meet every requirement of the governing statute. Generally, each statute requires certain words/abbreviations to indicate the entity´s type, restrict certain words, etc. In other words, you will need to meet Saudi´s Arabia requirements to name the company and the subsidiaries.
To do this, company formation agents in Saudi Arabia recommend researching the name´s availability as well as reserving them. Furthermore, you will also need to have the name be recognizable on the governing statute.
Can you convert your company to a holding company via a merger?
Another way besides forming a new entity acting as a holding company is to restructure an operating company. This can be done through a merger, meaning it can convert itself into a Saudi holding company. In this case, for this to be done, the merger requires a meeting as well as the shareholder´s approval.
Once you complete this transaction and convert the operating company, the stockholders’ possessions change. They will hold shares in the holding company while the company itself owns the stock of the surviving operating company.
How do you finance and use a holding company?
How is it financed?
The Saudi holding company´s management is the one in charge when it comes to deciding where to invest. This business obtains funds to invest by selling equity interest in itself or other subsidiaries. Nevertheless, they can also do this by borrowing.
On the other hand, it can also earn revenue when they receive payments from its subsidiaries. These payments are done in the form of dividends, interest payments, rents, distributions, and payments for back-office functions.
How is it used?
Businesses of all sizes in all industries can use a Saudi holding company. A holding company´s structure is popular with big enterprises that have multiple business units. For example, let us take a large corporation that produces or sells consumer goods such as hair care, skin care, and baby care products.
Instead of using only one corporation with different divisions, they might prefer to structure themselves with one holding company and numerous subsidiaries. In this case, they could have every business unit as a separate subsidiary in which the holding company owns a controlling interest.
Moreover, the Saudi holding company may place the trademarks, equipment, or real estate in separate subsidiaries. Furthermore, the operating companies may pay to use the trademarks, rent their offices, and lease the equipment.
Types of holding companies in Saudi Arabia
Lastly, if you decide to open a holding in Saudi Arabia, you need to know there are several types of it.
Pure
A Saudi holding company is pure if its owners create it only to own stock in other companies. In other words, this means that the owners create the company without the objective of participating in another business. Simply put, their only objective is to control 1 or more firms.
Mixed
Unlike a pure holding company, it is mixed when it also engages in its operations. On the other hand, experts consider a holding company as a conglomerate if they take part in unrelated lines of business from its subsidiaries.
Immediate
A Saudi holding company is immediate when it retains voting stock or control of another company. This is true even though an entity controls the company itself. In summary, an immediate holding company serves as a subsidiary of another.
Intermediate
Lastly, there is the intermediate Saudi holding company. Business setup experts consider them an intermediate if it is a firm that is a holding company as well as a subsidiary of a parent holding company. In summary, they are holding companies and subsidiaries at the same time.
One advantage they can benefit from is the fact that this type is exempted from having to publish the financial records as a holding company of the smaller group.
How can we help you open a holding company in Saudi Arabia?
In our agency, our main objective is to help foreigners not only immigrate to Saudi Arabia but also open businesses in the country. Furthermore, with Saudi Arabia´s laws changing constantly, the need for a team of professionals is growing by the day. This means that with our professionals, you will be able to obtain your needed guidance. You can contact our legal team for further assistance.
We understand how difficult it can become to carry out these processes in a different country. Aspects such as the language barrier and different regulations can make the path complicated. For this reason, we can help you in a variety of matters such as human resources and payroll services, business and accounting, immigration solutions and visa services, and more.
Would you like to know more about holding companies or other types of companies in Saudi Arabia? Email us at office@companyformationsaudiarabia.com. Feel also free to contact us at +971 58 515 8876. When you do it, our team of professionals will be ready to help you resolve any problems you have. Contact us if you want to establish a Saudi holding company and need assistance. Our Saudi business formation advisers can help you with a variety of services.
