Parent company

What it means

A parent company is a company that controls one or more other companies, its subsidiaries. Control means decisive influence over their management, most often through a majority of votes as shareholder, but also through the right to appoint and remove most board members.

A parent may be a holding with no operations of its own or an operating company that has moved part of its business into subsidiaries. Together with its subsidiaries it forms a group that for some purposes, such as de minimis aid or the SME definition, is treated as a single undertaking.

If the group exceeds the size criteria, the parent must prepare, besides its own accounts, consolidated financial statements presenting the group as a single entity. Smaller groups are exempt.

How it works in practice

The main financial flow in a group is dividends from subsidiaries to the parent. Between Slovak companies they are generally not taxed, so the parent can reinvest subsidiaries’ profits without further tax, which is one reason holdings are set up.

Parent and subsidiaries are related parties, so loans, services and rents between them must be priced under the transfer pricing rules. The group may use cash pooling or VAT group registration.

The parent is not automatically liable for a subsidiary’s debts, but banks often ask for its guarantee or a comfort letter. When identifying a subsidiary’s beneficial owner, one looks through the parent to the individuals who actually own and control the group.

What to watch out for

The parent controls the subsidiary but may not use it to the detriment of its creditors. Transfers of assets or profit out of a subsidiary in difficulty can be challenged, and in a subsidiary’s bankruptcy the trustee looks at every transaction with the parent in recent years.

When founding or buying a subsidiary, the administration should be considered in advance: separate books, accounts, tax returns and documentation of intra-group transactions. Without a clear purpose the structure can cost more than it brings.