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Can HoldCo pass through a dividend to Parent?

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I am acting for a Parent of a HoldCo. We loaned the HoldCo cash to buy NewCo and we charge interet. I can take a large dividend up from NewCo to HoldCo but because Holdco makes a loss (because of the interest) I am not sure how I can take a distribution up to the Parent. What am I missing? 

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By Tax Dragon
28th Apr 2022 11:20

BElaine wrote:

What am I missing?

An accounting advisor (aka an accountant)?

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By David Ex
28th Apr 2022 11:22

BElaine wrote:

What am I missing? 

Am accountant? Surely a group of companies such as yours has at least one accountant on the payroll.

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By paul.benny
28th Apr 2022 11:41

What are you trying to achieve here? If parent is earning interest, does it that not give it enough (distributable) profits to allow payment of a dividend? Or are you just trying get cash out from NewCo?

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By Paul Crowley
28th Apr 2022 11:55

Confused
Are there three companies?

And are you thinking of trying to bypass the losses of holdco?

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Replying to Paul Crowley:
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By thevaliant
28th Apr 2022 22:24

Of course there are three companies. There is always three fushing companies.

In fact, in at least two of the groups I audit, there are five of the batsard things.

Parent - Holdco - Newco.

NEWCO:
Newco is probably just paying cash direct to Parent - CR Bank, DR Intercompany with Parent.
Newco declares dividends - DR Dividend, CR intercompany with Holdco.

HOLDCO: (probably doesn't even have a bank account)
Holdco has a loan and is charged interst:
Receives dividend - CR Investment income, DR Intercompany with Newco
Charged interest - CR Loan with Parent, DR Interest payable.

PARENT: (earnes interest and takes cash)
DR Cash, CR Intercompany with Newco
CR Interest received, DR Loan to Holdco

The steps that are missing are Holdco declaring a dividend to Parent of the same it receives from Newco LESS interest charge, and loads of intercompany waivers because of the stupid intercompany balances building up in Newco/Holdco/Parent.

I'd like to say this is the ONLY time I've ever seen such rubbish.... but it's literally my entire fushing job at times.

And as for the tax, I leave that to the tax department (but there is taxable income flying around the group, though FII exemption helps).

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By nrw2
28th Apr 2022 12:24

Dividends are paid from distributable reserves (on the balance sheet), not the P&L.

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Replying to nrw2:
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By The Dullard
28th Apr 2022 12:40

No. The Companies Act says that dividends can only be paid out of profits available for the purpose, but:
1. who mentioned the P&L anyway, and
2. where do you think the distributable reserves on the balance sheet come from?

Are there really no gaps in your ignorance?

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By Wanderer
28th Apr 2022 13:25

BElaine wrote:

What am I missing? 

Profits in HoldCo.
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Replying to Wanderer:
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By David Ex
28th Apr 2022 13:26

Wanderer wrote:

BElaine wrote:

What am I missing? 

Profits in HoldCo.

And the word “please”, obviously.

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Stepurhan
By stepurhan
28th Apr 2022 13:37

"I am acting for a Parent of a HoldCo"

"We loaned the HoldCo"

Very unusual for an adviser to loan money to client companies.

It sounds like taking some advice beforehand on this arrangement was probably advisable. Probably too late to unpick it now.

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By DKB-Sheffield
28th Apr 2022 15:35

I'm getting confused...

NewCo makes a profit and distributes a dividend to HoldCo?

HoldCo receives said dividend but it is less than it's loss (i.e. doesn't cancel it out) by virtue of the interest paid to Parent?

Parent wishes to declare a dividend but can't because it hasn't received a dividend from HoldCo (assumes costs exceed Parent's income - including HoldCo's interest)?

Are you asking whether NewCo can declare a dividend to Parent (a non-shareholder)?

I'm with others. If such a structure has been implemented, the owners of Parent MUST have taken advice on implementation of the structure. It's now time to turn back to them for advice on how to work it (or how they planned on it working).

Incidentally, is the interest realistic (market rates)? Seems a little unusual for interest on the acquisition of a trading entity to outweigh profits of the subsidiary (unless there were exceptional costs).

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Replying to DKB-Sheffield:
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By paul.benny
29th Apr 2022 08:21

DKB-Sheffield wrote:
Seems a little unusual for interest on the acquisition of a trading entity to outweigh profits of the subsidiary

Not at all unusual in private equity world.

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Replying to paul.benny:
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By Hugo Fair
29th Apr 2022 11:53

Indeed ... I sometimes wonder whether that was the primary driver for the deal.

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Mike Cooper HJS
By mike_uk_1983
29th Apr 2022 12:51

Holdco by receiving the dividend will create distributable reserves. These clearly wont be as high as the original dividend but if greater than the losses will allow some dividend to be voted.

There are other options to resolve the situation but as others have said you need to take some advice on this.

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