What is a Holding Company?

A holding company is a corporation that owns shares in another company. It is usually between
the operating company and the individual shareholder, and it owns the operating company’s
voting stock and assets and controls its management and policies.

Holding company under the Saudi company law

A holding company can either be a Joint Stock Company or a Limited Liability Company, which
aims to control other joint-stock or limited liability companies, called subsidiaries, by owning
more than half of the capital of such companies or by controlling the formation of their boards of
directors.

Subsidiaries cannot own shares in the holding company. Any act leading to the transfer of
shares or stocks from the holding company to the subsidiary will be considered null and void.

The holding company must prepare, at the end of every financial year, consolidated financial
statements with its subsidiaries.

Purposes of a Holding Company

● Managing its subsidiaries or participating in the management of other companies in

which it owns shares and providing support thereto;
● Investing its funds in shares and other securities;
● Owning real property and movable assets necessary for its operations;
● Providing loans, guarantees, and financing to its subsidiaries;
● Owning and utilizing industrial property rights, including patents, trademarks, franchises,
and other intangible rights, and leasing the same to its subsidiaries or third parties; and
● Any other legitimate purpose in conformity with the nature of the company.

Advantages of a Holding Company

1. Liability protection

Using holding companies is an asset protection planning strategy that helps to limit the liability
risks of a business structure. It is an ideal business structure consisting of an operating entity
that does not own any vulnerable assets and a holding entity that owns the business's assets.
With this structure, the small business owner can eliminate or limit the liability for both business
debts and personal debts.

2. Asset management
A holding company needs to control its subsidiaries but doesn’t necessarily need to own all
shares or membership interests. This allows a holding company to obtain control over the
assets of another company at a lower cost against all of the subsidiary’s interest.

3. Lower debt financing costs

A holding company that has a good financial standing can obtain loans for a lower interest rate
than its operating companies could, specifically in instances wherein the business in need of
capital is a startup or the other venture is considered a credit risk. The holding company can
obtain the loan and distribute the funds for its subsidiary.

4. Promotes innovation

Operating companies are separate entities therefore there is less risk in investing in startups or
other ventures that seem risky.

5. Day-to-day management is not necessary

A variety of unrelated industries can be owned by a holding company. It doesn’t matter if the
owners and managers of the holding company don’t know about those businesses because
each subsidiary has its management to run the day-to-day operations.

Disadvantages of a holding company

1. Formation and ongoing compliance costs

The holding company and each subsidiary that is formed require the payment of formation fees.
There will also be, in most cases, annual report and franchise tax obligations.

2. Management challenges

As noted, a holding company does not have to own all of the subsidiaries’ ownership interests.
This can be both an advantage and a disadvantage. It does not own 100% of the interests and
will have to deal with the minority owners. In some instances, conflicts may arise when the
interests of the minority owners are different from those of the holding company.

3. Complexity

The use of holding companies and subsidiaries adds an element of complexity not found in the
single-entity structure. When a publicly-traded corporation uses a holding company structure, it
can be very complex, with many subsidiaries to keep track of.