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Library ~ The Benefits of a Delaware Investment Holding Company

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 Employing a Delaware Investment Holding Company to Finance Affiliated Operations

Parent corporation (Parent) has a large amount of cash resulting from some event such as an IPO or the sale of an asset. The Parent is aware that this cash can be used to capitalize a corporation in Delaware. The cash in the Delaware Investment Holding Company can then be loaned to the parent company at an arm's length rate. The loan will create deductible interest expense for the Parent and tax free interest revenue for the holding company. The tax analysis follows:

TAX ANALYSIS BEFORE DHC SUB CREATED

Parent Income

$100,000,000
Deductions

$20,000,000
Taxable Income

$80,000,000
State Tax Rate

10%
State Tax

$8,000,000

TAX ANALYSIS AFTER DHC SUB CREATED WITH A $50 MILLION CONTRIBUTION

In Parent State                                                      

In Delaware
Parent Income

$100,000,000

 Interest on loan

$4,000,000
Deductions

20,000,000

 State Tax Rate

0%
Interest Exp. Deduction*

4,000,000
Taxable Income

$76,000,000

 State Tax Due

 $      0
State Tax Rate

10%
State Tax Due

$7,600,000
*$50,000,000 loan X 8%= $4,000,000

One can see the Parent saves $400,000 (8,000,000-7,600,000) by employing the DHC.

The sub's $4,000,000 income is not taxable and created a $4,000,000 deduction for the Parent.
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