Tom and Bob are equal shareholders of a profitable company which earns only active business income. The company is growing and dividend payouts are increasing. The two men have heard that 'holding corporations' might suit their needs. Which of the following would apply if they each created a holding corporation, each of which owned 50% of the company?
A) Dividends received by the holding corporations from the operating company must be invested in the same ventures.
B)The holding corporations would receive the dividends from the operating company, free of tax, to be invested in Tom's and Bob's separate choices.
C) The establishment of holding corporations would allow Tom and Bob to access the profits of the operating company for personal use without paying a second level of tax.
D) Dividends would flow from the operating company to Tom and Bob, and then to the holding corporations.

Question

Quizplus · Accepted Answer

Dividends received by holding corporations from the operating company are typically tax-free due to inter-corporate dividend tax rules, allowing Tom and Bob to invest according to their preferences.

Tom and Bob Are Equal Shareholders of a Profitable Company