ACCA Advanced Taxation (ATX) Practice Exam

What is the implication for a holding company that does not trade?

1. It is automatically exempt from taxation

2. It cannot be associated with any trading company

3. It must always file separate tax returns

4. It may have reduced tax liabilities

The correct answer is: It cannot be associated with any trading company

The correct choice indicates that a holding company that does not trade cannot be associated with any trading company in terms of certain tax benefits. Holding companies primarily exist to own and manage the assets or shares of other companies rather than engaging directly in trade. This structure can influence how the tax rules apply, especially concerning group relief and other associated benefits. In many jurisdictions, for tax purposes, a non-trading holding company is treated differently than trading entities. This could prevent it from claiming certain allowances or being part of tax-efficient arrangements that apply only to active trading businesses. In contrast, other options do not accurately reflect the tax implications for a non-trading holding company. For example, it is not automatically exempt from taxation; it may still owe taxes on any income generated from investments. Additionally, a holding company must file tax returns as per the jurisdiction's regulations, regardless of its trading status. Finally, while a holding company might enjoy certain advantages, it is not guaranteed reduced tax liabilities solely based on its non-trading status.