How trading and asset holding companies should be connected within a trust
Trade inherently holds relatively high risk compared to asset holding, so they should be in separate trust-owned companies. But how do you get the money from one to the other?
Many would advise you to have them both owned by a holding company (see the article image taken from such an advisor’s website). The trading company declares its profits out via regular dividends to the holding company, which in turn lends them to the investment company.
There’s no Dividends Withholding Tax when the shareholder is another company and the dividends keep the value of the trading company near nil, so that if it fails, there’s nothing there for the creditors. In the meantime, the dividends lent by the holding company to the investment company are safe and can be used to build its property (or share) portfolio.
Whilst this works, it is not the most elegant solution because it involves three companies to do the job of two, and the inter-company loans must be accounted for. Also, tax returns and CIPC returns have to be submitted for the additional company.
Here’s a better solution.
The shares in the trading company are held by the investment company. Dividends flow and can then be directly invested in the property or share portfolio. One less company and no inter-company loan accounts!
If the trading company uses fixed assets, such as plant and machinery, then you would not want to lose these assets if it went bung. They should be held by the investment company and rented to the trading company.
And the rental reduces the trading company’s profits and less frequent dividends will need to be declared. The rental income is taxable in the hands of the investment company, so the tax effect is neutral.