Holding Company vs Parent Company vs Subsidiary: The Law

A holding company, a parent company and a subsidiary are three names for one relationship: a company that controls another.

Company law defines only two of them, and none of the three hides the founder at the top of the chain.

The short answer

Hold on to three things:

• The legal test is control. "More than 50% of the shares" is only one way to meet it.
• "Holding" versus "parent" is a business habit, not two legal categories.
• A company placed between you and your subsidiary does not remove you from the registers.

What the law defines: holding company and subsidiary

In the United Kingdom, section 1159 of the Companies Act 2006 says a company is a "subsidiary" of another, its "holding company", if that other company:

• "holds a majority of the voting rights in it"
• "is a member of it and has the right to appoint or remove a majority of its board of directors"
• "is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it"

Hong Kong's Companies Ordinance sets its own three tests in section 13. Section 15 defines the subsidiary as the mirror image.

Singapore's Companies Act 1967 sets two tests in section 5(1). Sections 5A and 5B cover the "ultimate holding company" and the "wholly owned subsidiary"; we read their headings only.

Two details matter to a founder:

• Votes, not shares. The UK test counts voting rights. Hong Kong adds issued share capital as a route of its own. On our reading of the two texts, Singapore does not.
• Board control is defined. In Hong Kong and Singapore it means the power to appoint or remove all the directors, or a majority, without anyone else's consent.

All three laws follow the chain down.

1. Company A is the holding company of B.
2. B is the holding company of C.
3. C is therefore a subsidiary of A as well.

Where "parent company" comes from

"Parent" appears in none of these tests. It lives in the accounting rules.

Section 1162 of the UK Act uses a second pair for accounts: "parent undertaking" and "subsidiary undertaking". The Hong Kong ordinance refers to the same two notions and defines them in its Schedule 1.

The UK accounting test is wider than section 1159. An undertaking is a parent if it:

• holds a majority of the voting rights
• is a member and can appoint or remove a majority of the board
• has the right to exercise a dominant influence under the articles or a control contract
• is a member and controls a majority of the voting rights by agreement
• has the power to exercise, or actually exercises, dominant influence or control
• is managed on a unified basis with the other undertaking

Holding company and subsidiary

s. 1159company law

Three tests.

• Majority of the voting rights
• Member, with the right to appoint or remove a majority of the board
• Member, controlling a majority of the votes by agreement

Parent and subsidiary undertaking

s. 1162accounts

Six tests: the same three, plus:

• Dominant influence under the articles or a control contract
• Dominant influence or control, held or actually exercised
• Management on a unified basis

"Parent company", the everyday form, has no definition in the sections we read.

So one company can be a holding company under one section and a parent undertaking under another. "Parent company", the everyday form, has no definition in the sections we read.

Holding company vs parent company: a habit, not a category

Provider guides such as UpCounsel and SmartAsset draw this line:

• a holding company owns shares and does not trade
• a parent company owns shares and runs a business of its own

None of the statutes above draws it. In UK and Hong Kong company law, "holding company" is simply the legal name of the controlling company, whether it trades or not.

Two consequences:

• A trading company with one subsidiary is a holding company in law.
• A form asking for your "parent company" and one asking for your "holding company" ask the same question: who controls this entity?

Wholly owned subsidiary: more than "100%"

Guides say "100%". UK law puts it differently.

"A company is a 'wholly-owned subsidiary' of another company if it has no members except that other and that other's wholly-owned subsidiaries or persons acting on behalf of that other or its wholly-owned subsidiaries."

Read it in three steps:

1. The test looks at who the members are, not at a percentage.
2. Shares held by another wholly owned subsidiary of the same holding company do not break it.
3. Shares held by a person acting on behalf of the holding company do not break it either.

In section 1159, "company" includes any body corporate, so the holding company of a UK company can be a foreign one.

These definitions speak of companies and bodies corporate, so a founder who owns the shares personally is a shareholder, not a holding company.

Subsidiary vs branch: two different questions

A branch is not a company, so it is neither a subsidiary nor a holding company.

Our Singapore guide sets the two side by side:

The full comparison is in subsidiary, branch or representative office in Singapore.

For other countries, keep the one principle our guides state: a branch is not a separate legal person.

A foreign company owns 100% of yours: four cases

You own a company abroad, and that company owns all the shares of a new one.

1. 1
   You, the founderAn individual: a shareholder, never a holding company under the definitions read. Controller registers look for you above 25%, in Hong Kong directly or indirectly.
2. 2
   Your foreign companyHolding company in company law, parent undertaking in the accounts. It meets the subsidiary test: a majority of the voting rights, or control of the board.
3. 3
   The new local company, owned 100%Subsidiary, and wholly owned if it has no other member.

United Kingdom. For a UK company owned from abroad, the definition applies whatever the holding company's country.

Singapore. Our company types guide lists what follows from a corporate shareholder:

• An Exempt Private Company has at most 20 shareholders, all individuals. One corporate shareholder removes that label.
• The resident director requirement stays, whoever owns the shares.

United States. The Delaware provisions we read do not use "parent" and "subsidiary" as categories.

• A Delaware LLC can be owned by a company, including a foreign one.
• Its certificate of formation names no member, so the owner does not appear in the state filing.
• Form 5472 is due from a US corporation that is 25% foreign-owned, and from a foreign-owned disregarded entity.

What the chain changes in the controller registers

Two thresholds are easy to confuse.

The second question does not stop at the first company in the chain.

• Hong Kong. The controllers register covers direct or indirect holdings of more than 25%. A corporate shareholder above that line is entered too.
• United Kingdom. A person with significant control holds more than 25% of the shares or voting rights, or can appoint or remove a majority of the directors.
• Singapore. The register of registrable controllers uses the same line of more than 25%, and it is not open to the public.

The Hong Kong Companies Registry gives its own example: a British Virgin Islands company holds the shares, and both that company and the person behind it are entered.

Putting a company between you and your subsidiary does not take you off the registers. It adds a layer you have to document.

We did not read how the UK and Singapore registers trace ownership through a foreign company, so check before you file.

Before you add a layer, prepare four things:

1. A chart of the chain, from the individuals at the top to the operating company.
2. The share of capital and of votes held at each level.
3. Who can appoint or remove directors at each level.
4. Who updates each register when one level changes.

What a bank asks when the shareholder is a company

No published rule covers this, so read what follows as an expectation. Our banking guides for Hong Kong and Singapore describe the baseline:

• Hong Kong: identity and address documents for every director and beneficial owner.
• Singapore: passport and proof of address for every director, shareholder and beneficial owner, with certified copies for non-residents.

With a corporate shareholder, the people behind the company sit one level higher, so expect to be asked for:

• the holding company's own incorporation documents
• a chart of the chain up to the individuals
• identity documents for those individuals

Each bank sets its own list, so ask for it before you apply.

Tax: one fact, and what this article leaves out

This article describes no tax structure. How a group is taxed depends on the law of both countries and on advice from someone qualified in both.

One official fact shows why the word "subsidiary" settles nothing. IRAS says some foreign-owned investment holding companies "are generally not considered tax residents of Singapore". Three conditions apply:

• 50% or more of the shares are held by foreign companies or by individuals who are not Singapore citizens
• the test is applied at the level of the ultimate holding company
• the income is purely passive or foreign-sourced

Incorporation in Singapore does not settle residence.

The summary