Associated corporation concepts: How to distinguish between a subsidiary and a holding company?

Associated corporations, “subsidiaries” and “holding companies” are some of the most important concepts that are essential to ensure the accuracy and fairness of financial statements. In this article, we will discuss the definitions of these concepts and the differences between them, as well as the requirements of the Companies Ordinance (Cap. 622) to help readers better understand these key accounting concepts.

What is an associated corporation?

An associated corporation is two or more corporations in which one or more of the members has control over one or more of the other members. This control may be direct or indirect.

For example, corporation A may directly control corporation B (i.e. A owns more than 50% of B’s shares) and indirectly control corporation C (i.e. B owns more than 50% of C’s shares). In this case, A, B and C are all regarded as associated corporations. In actual accounting practice, transactions with associated corporations must be properly handled and disclosed to ensure the accuracy and fairness of the financial statements.

Definition of Subsidiary

Under the Companies Ordinance (Cap. 622), a company is considered to be a “subsidiary” of another company if any one of the following conditions is met:

It is controlled by another company (i.e. the “parent company”). This control is usually due to the fact that the parent company owns more than half of the voting rights.

The shareholders held by the parent company have more than one-half of the voting power at annual or special meetings of the company.

The parent company has the power to appoint or remove more than half of the members of the company’s board of directors.

In some cases, even if the parent company’s shareholding or voting rights do not amount to one-half of the above, the company may be treated as a subsidiary as long as the parent company has substantial influence. For example, a company may become a subsidiary of the parent company if the parent company has the right to participate in the financial and operating decisions of the company.

Definition of a Holding Company

A “holding company” is a corporation that has the ability to control one or more subsidiaries. It is the opposite of a subsidiary. A company is considered to be a holding company of another company if any of the following conditions are met:

It controls the other company. This control usually results from the company holding more than half of the voting rights in the other company.

It holds more than half of the voting rights at an annual or special meeting of the other company.

It has the power to appoint or remove more than half of the members of the board of directors of the other company.

Therefore, if Company A owns or controls more than half of the shareholding or voting rights of Company B, or is able to appoint or remove a majority of the members of the board of directors of Company B, then Company A is the controlling company of Company B, and Company B is a subsidiary of Company A. The above information is for reference only. If you have any enquiries about tax return (individual tax return, corporate tax return, accountant tax return), we welcome you to contact our professional advisors and will provide you with a free quote and consultation service in due course.