German GmbH Holding
Tax benefits and asset accumulation through holding structures
Many entrepreneurs who have been involved in equity sharing for years know on thing: Over time, there is a risk of uncontrolled growth in shares. A holding provides corporate assets with a clear structure. The entrepreneur as a private person has only one share that affects them personally - that of their GmbH Holding company. This also makes asset succession in Germany much easier. Holding structures are particularly popular due to their great tax advantages for entrepreneurs. While profits from an operating GmbH are taxed at 30 percent, dividends that the Holding GmbH receives from its holdings are only taxable at 1.5 percent. Further tax advantages are also available in the event of the Holding GmbH being sold by a holding company.
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What is a Gmbh Holding?
GmbH Holding means a GmbH (German Limited Liability Company) as parent company, which holds shares in one or more other companies, usually in other corporations (generally GmbHs).
Who is a Holding GmbH suitable for?
Entrepreneurs who spend a lot of time managing the operational business often find themselves losing track of their investments after several years and the group of companies lacks a clear structure: Occasionally, the entrepreneur is privately involved in a target company, sometimes through one of their operational GmbHs, sometimes they hold 100 percent, sometimes only a minority stake. Here's a GmbH, there's a GmbH & Co. KG and occasionally there is also an AG involved - not to mention foreign private equities. While one company is doing well, the other is on the brink of bankruptcy.
This is where the holding structure comes into play: a holding gives corporate assets a clear structure. As flexible as entrepreneurs have to be in their daily decisions - it is helpful for them if they can move within a legally clear and tax-optimized structure: All operational activities at the lowest level can then be easily controlled centrally via the holding company. Future investments and start-ups are all made through the Holding GmbH. And the entrepreneur as a private person has only one single share that affects them personally - that of their GmbH holding company.
It is obvious that such a structure also significantly simplifies asset succession: Instead of having to involve the three children and spouse in 18 different companies as part of the inheritance, it is sufficient to transfer the shares in one single company - the GmbH holding company.
Save taxes and build up assets with a Gmbh Holding structure
The holding structure also offers enormous tax advantages to entrepreneurs because the holding company acts like a savings box and is an almost ideal investment vehicle - for the following reasons:
High taxes if the entrepreneur is personally involved in an operational GmbH:
a) Profits from an operational GmbH are taxed at approximately 30 percent (corporate tax and trade tax). If the entrepreneur were personally involved in such an operational GmbH and would approve a distribution (dividend) from the GmbH, they would also have to tax this distribution with the withholding tax rate of 25 percent. In numbers: With a distributable profit of 1 million euros, the entrepreneur only receives 750,000 euros, the rest (250,000 euros) goes to the tax authorities.
b) If the entrepreneur were to sell their shares, they would also have to expect taxation of around 25 percent on the gain on sale.
Favorable taxation within the holding structure:
a) Dividends that the Holding GmbH receives from its shares are only taxable at 1.5 percent. The reason for this is § 8b Corporation Tax Act (KStG). This means that 95 percent of the profit distributions of the GmbH Holding are tax-free. Only the remaining 5 percent are taxable. With a corporate and trade tax rate of approximately 30 percent in total, this results in an overall tax burden of only 1.5 percent (5% x 30%). In numbers: With a distributable profit of 1 million euros, 985,000 euros will go to the holding company and 15,000 euros to the tax authorities. In comparison to the situation described above, the holding company therefore gets to keep 235,000 euros more for reinvestment, e.g. in other start-up or scale-up companies.
b) The same applies if the Holding GmbH sells one of its shares. The capital gain is taxable at only 1.5 percent.
This way, the Holding GmbH is provided with minimally taxed proceeds, which it can reinvest in the establishment of further operating GmbHs or other units.
Distributions from the Holding GmbH to the entrepreneur
25 percent capital gains tax plus solidarity surcharge only applies if the Holding GmbH in turn makes distributions to the entrepreneur. Of course, this is only necessary if the shareholder really needs the money. This is often not the case because the entrepreneur already generates sufficient current income elsewhere (e.g. income from managerial activities, rental income from property investments, etc.).
But even if there is a need of money, it does not necessarily have to be satisfied in the form of a distribution from the Holding GmbH. In individual cases, entrepreneurs can also grant themselves a loan from their Holding GmbH (secured and with interest at ordinary market rates).
Of course, distributions can also be individually managed in such a way that they only take place in times in which the entrepreneur hardly generates any other income - e.g. at retirement age. In these cases, depending on the amount of the distribution and the entrepreneur's personal situation, the tax burden can be reduced below 25 percent.
VAT-free exchange of services between Holding GmbH and operative GmbH
Various companies of an entrepreneur often exchange services and/or goods among each other. For example, one company may be designated to manufacture goods, while the other serves as a sales unit. Yet another company provides book-keeping and other accounting services centrally to the other GmbHs. In such scenarios it might be convenient if no sales tax has to be billed for such “internal sales” in the group of companies. If correctly managed, this can be done if the requirements of the so-called VAT group are met. Such a group requires the so-called controlled company (e.g. an operational GmbH) to be integrated into the so-called fiscal parent company (e.g. the holding company): The controlled company must be integrated organizationally, financially and economically. We are more than happy to support you in creating these conditions.
Our consulting services for GmbH Holding structures:
Option 1: Structuring your company assets "from scratch":
Ideally, you would structure your company assets as a holding company from the start. In practice, however, we rarely see this. The reason is obvious: When the first company was founded, there was usually no time for such far-reaching planning considerations. Money is also in short supply, and often there is simply a lack of knowledge about the advantages of alternative arrangements. At a young age, many entrepreneurs also have no idea where the business journey will lead them one day. It is rarely foreseeable at the beginning that a single company will grow into a group of companies over the years.
Option 2: Optimizing and rearranging existing company structures:
Usually, we advise experienced entrepreneurs on how to optimize and rearrange the existing corporate structure:
- We take into account all of the entrepreneur's assets, the entirety of their business interests and other private investments (real estate, securities, art, etc.) as well as their personal family situation, and plan the optimal asset structure in terms of actual, legal and tax considerations.
- We also include legal entities other than just GmbHs in our assessments (GmbH & Co. KGs, foundations etc.). For example, in individual cases, it might be worth considering the incorporation of the Holding GmbH into a (family or nonprofit) foundation as the parent holding company.
- We draft all the necessary contracts (in particular, contribution and share exchange agreements) and coordinate them with the notary.
- Of course, we also coordinate the project with the tax authorities if necessary.
- We implement the planning considerations and take all effects on taxes into account. Ideally, the restructuring should be tax neutral. However, the devil is often in the details (real estate transfer tax, uncovering hidden reserves, fragmentation of businesses etc.). In any case, the restructuring should pay off for the entrepreneur - that is our ultimate goal.
Your planning consultants for GmbH Holding structures in Germany
Our attorneys and tax advisors will be happy to help you set up a holding structure that is suitable for you. The sooner you start, the easier it will be. Feel free to contact attorney Boris Piekarek, head of our team “Assets, Foundations, Succession”. He will plan a corporate structure for you and with you that provides both entrepreneurial freedom and tax advantages. The easiest way to reach us is by email (email@example.com) or by phone (+49 (0)69 76 75 77 80).
Among 398 companies, WINHELLER has made it into the 2020 best list in the field of tax law.
The JUVE handbook taxes 2020 recommends WINHELLER in the category of high net worth private individuals.
WINHELLER is listed as one of Germany's top tax law firms in the field of "Nonprofit and Foundations".