Edition | Edition

BGB | Civil Code

BFH | Bundesfinanzhof

ff. | continues following

according to

EStG | Income Tax Act

GbR | civil law company

GmbH | Company with limited liability

GmbHG | Law concerning limited liability companies

HGB | Commercial Code

i.H.v. | in the amount of

i.V.m. | in conjunction with

KSt | Corporate Tax

or similar

oHG | open commercial company

Rn | Requirement

UmwStG | Conversion Tax Act

e.g. | for example

plus | plus

The civil structuring and tax peculiarities of holding companies are the focus of the following considerations. On the one hand, it is about the diverse possibilities and starting situations from which holding companies can be founded. The analysis of tax aspects is also an important part of this contribution. This concerns both income taxes and sales tax. In particular, by including bodies, many special features of holding companies come to light here.

Furthermore, the common abbreviations according to Kirchner, Hildebert, abbreviation list of legal languages, 7th ed. 2013.

The present work deals with the civil law design and the tax peculiarities of holding companies. The work is divided into two themes. The first topic is the civil law design of holding companies.

This is explained based on the life cycle of a company. After a brief explanation of the basic concepts of a holding company, the establishment of a holding structure begins. This is followed by an explanation of the civil proceedings concerning the sale and donation of shares of both the holding companies and subsidiaries. After the steps of a liquidation are explained as a result, the participation in a holding structure is discussed.

The civil part of the work ends with the presentation of four common holding structures, the operative holding, the financial holding, the management holding and the organizational holding.

The second topic deals with the tax specificities of holding companies.

Similar to the first topic of work, the civil law part, the tax law part is also based on the life cycle of a company. Initially, the tax peculiarities of holding companies are dealt with when setting up. This explains the differences between the new establishment of both the subsidiary and the parent company, the combination of an existing subsidiary and a newly established holding company and the combination of an existing subsidiary with an existing holding company.

Subsequently, the tax peculiarities of holding companies in current business operations are explained. This refers separately to the taxation of the subsidiary, the holding company and the shareholders of the holding company.

In addition, it deals with the specificities of the sale, donation of shares in a subsidiary or holding company and their liquidation.

Then the organ body is treated. This starts with the corporate tax organization, the prerequisite for the formation of a corporate tax organization, the basic concepts, such as profit and loss transfer agreements and group contribution, are explained and the income calculation of a corporate tax organization is discussed. Subsequently, analogous to corporate income tax, the sales tax organization is also treated.

The main part of this work deals with holding companies in the form of corporations. This is due, inter alia, to the fact that the legal form of a limited liability company gives rise to tax advantages in current taxation and in the taxation of capital gains. These are discussed in more detail in the relevant chapters. Since it may also be useful to set up a holding company in the form of a partnership, the advantages, disadvantages and possibilities of use resulting therefrom are explained in the chapter following the organization.

The main part of the work is completed with a short presentation of forward-looking uses of holding companies.

The work will show that holding company is not the same as holding company. It shows that there are numerous possibilities to build corporate structures in which holding companies are used. Depending on the structure of the society, there are various advantages and disadvantages, which are explained in the context of the work. It is shown that, depending on the individual case, it is necessary to decide how a holding structure should be set up and in which legal form the corresponding holding company should be set up in order to achieve an optimal result under both civil and tax law.

A holding company is a company whose purpose is to hold shares in other companies. [1] The term “holding company” comes from the English word “to hold”, which can be translated as “hold”. [] 2]

A corporate structure in which a holding company is involved is called a holding structure. In order to create such a holding structure, at least two companies are required, a holding company, which is also referred to as parent company, and a subsidiary. The parent company holds shares in the subsidiary.

The legal form in which a holding company must be established is not regulated. [3] Therefore, if a holding company is to be set up, it must be specified in advance in which form it is to be set up. Depending on which form of company has been chosen here, the further civil law steps for the formation of the company differ and result in different advantages and disadvantages, inter alia with regard to the taxation of current profits, the liability relationships and the tax treatment of the sale of shares in the holding company. In order to explain the differences in civil law in the formation of a holding company depending on the legal form, the steps of the establishment and the consequences of the respective legal forms are explained in the following paragraphs on the basis of a comparison between GbR, KG, GmbH & Co. KG and GmbH.

When selecting the legal form of a holding company, it must be checked in advance which legal form fits the individual requirements of the company. Even if the majority of the holding companies are founded in the form of the GmbH or the UG[4], the decision to choose the legal form must be examined and assessed individually in each individual case.

If a holding company is founded in the form of a GbR, unlike other forms of company, such as the GmbH, no share capital is required. The remaining founding processes are also much more straightforward with a GbR than with comparable forms of company, since only a social contract must be drawn up, which is usually formally effective and does not require entry in a register,[5] which makes it attractive for shareholders with smaller companies, since the founding is therefore also associated with lower costs. [6] The biggest disadvantage of establishing a GbR is the adhesion relationships. According to the regulations of the BGB, the liability of the shareholders for the liabilities of GbR is “direct, unlimited, jointly and severally and extends to their private assets”[7]. If a holding company is thus established in the form of a GbR, the shareholders are exposed to a high risk of liability. In addition, at least two shareholders are required for the establishment of a GbR. Therefore, if a sole shareholder of an operating company wishes to set up a holding company, the option of holding GbR is already waived for the latter. [8]

It is also possible to set up a holding company in the form of a limited partnership. Here, the expenses for the establishment are also relatively low. However, the limited partnership also has the disadvantage that it basically requires at least two shareholders, the limited partner and the general partner. Liability could also become a problem at KG. Although the limited partner is only liable up to the amount of his contribution, the general partner is liable for this without limitation with all his assets, including his private assets. Unlike the founding of a GmbH, the social contract of a KG does not require a notarial form. However, a limited partnership must be entered in the competent commercial register. [9] This entails start-up costs, which must be taken into account when choosing the legal form.

The problems of incomplete limitation of liability, as well as the minimum number of two shareholders, can be circumvented, however, by the sole shareholder founding a GmbH and appointing it as a general partner in the limited partnership. This creates a GmbH & Co. KG. For this type of company, only one shareholder is necessary, who acts as the sole limited partner of the KG and as the sole shareholder of the GmbH as a general partner of the KG. Liability is also limited by a GmbH & Co. KG. The natural person as a limited partner is only liable with his contribution, but the full liability is assumed by the GmbH as a general partner, which is limited in itself. However, the disadvantage of a GmbH & Co. KG is the relatively high start-up expense. It is not only necessary to found a KG, but also a GmbH. For this purpose, a share capital of at least 12,500.00 € must be paid in. [10] In addition, there are costs for establishment, registration for registration in HR, and notarized deed.

The most common legal form of holding companies, however, is the GmbH. If a Holding GmbH is to be founded, it is necessary to contribute a share capital of at least € 25,000.00 to the GmbH. [11] In most cases, this is done by a cash deposit, but it is also possible to make a contribution in kind. In the case of a cash foundation, according to § 7 Abs. 2 GmbHG at least half of the share capital is paid into the company. [12] In addition, when establishing a GmbH, a social contract must be concluded, which must be notarized. [13] This articles of association must contain the following information: ‘the company and its registered office, [...] the object of the company, [...] the amount of the share capital, [...] the number and nominal amounts of the shares which each shareholder takes over against a contribution to the share capital (the ordinary contribution).’ In order for the GmbH to be established, the company must subsequently be registered for registration in the commercial register. A further disadvantage of a GmbH as a holding company is that it is obligated as a merchant by virtue of legal form to draw up books. This creates additional administrative burdens. Despite the relatively high start-up expenses and administrative expenses of a GmbH, however, it offers some advantages in the selection as a holding company. On the one hand, it is possible to set up a Holding GmbH alone, as the GmbHG does not specify a minimum number of shareholders[15], on the other hand, the personal liability of the shareholder or shareholders is excluded. The company has limited liability with its share capital. [16] In addition, a corporation as a holding company has major tax advantages, for example in the case of ongoing taxation and the sale of shares in subsidiaries compared to partnerships. These tax peculiarities are discussed in detail in chapters C.I – C.II.

When holding companies are incorporated, they in practice have the majority of the legal form of a corporation. Most of the holding companies are founded as GmbH or UG. A foundation as Holding AG is also possible. [17]

Due to the fact that the majority of holding companies are formed in the form of corporations, the following chapters deal mainly with these.

If a holding structure is to be created, there are three possibilities for this. The first possibility for this is to start two companies and to accommodate them in a holding structure. However, if the operating company already exists, it is also possible to set up a new company and to contribute the operating company as a contribution in kind or by foundation in kind to the new company, the later holding company. Here, however, the seven-year blocking period must be observed for tax purposes; These will be discussed in more detail in the following chapter. The third possibility is that all companies that are to appear in the later holding structure already exist. Here it is possible to subsequently form a holding structure from these by means of suitable company law measures.

1st establishment of two companies to create a holding structure

If a holding structure is to be created without existing companies, this is done by re-establishing at least two companies. In the simplest holding structure, only two companies, the so-called parent company and the subsidiary, are needed. The parent company holds the shares of the subsidiary, thus acting as a holding company, while the subsidiary carries out the operating business.

In the majority of cases where simple holding structures are established, both the subsidiary and the parent company choose the GmbH as a corporate form[18]. If a Holding GmbH is to be founded, the same procedure must be followed here as for the establishment of the subsidiary. First of all, a company contract must be drawn up between all future shareholders of the GmbH, which according to § 3 para. 1 GmbHG ‘the company and the registered office of the company, [...] the object of the company, [...] the amount of the share capital [...] as well as the number and nominal amounts of the shares which each shareholder assumes against contribution to the share capital (common contribution). [19] contains. The company name is used to designate the company and must bear the addition “Limited Liability Company” or a corresponding abbreviation. If a holding company is founded as a GmbH, a company name such as “Müller Holding GmbH” or “Müller Beteiligungs GmbH” is common. It is clear to the outside world that this is a company that serves the purpose of purchasing and holding company shares. This is also the purpose of the company enshrined in the articles of association. The amount of the share capital, which according to § 3 Abs. 1 no. 3 is to be listed in the articles of association, depends on the decisions of the shareholders. In the case of operating companies, the share capital is often higher than the legally anchored €25,000.00[20] in order to obtain a sufficient creditworthiness with banks or a higher seriousness towards potential business customers. [21] However, since this is usually not necessary for holding companies, the share capital here is usually set at € 25,000.00. Further necessary funds can be brought into the company as a capital reserve or in the form of a liability of the company to the shareholder, such as a loan.

If the company contract of the Holding GmbH with the aforementioned data has been drawn up, this is still to be certified by a notary. Subsequently, the shareholders must prove the performance of their ordinary contribution before the notary can register the company for registration in the commercial register. The parent liner may take the form of a cash liner, a non-cash liner or a mixed liner.

If a cash contribution is made, the shareholder pays the deposit stipulated by the articles of association into a bank account of the company, for example. The formation of cash must be paid at least half at the time of the application for registration in the commercial register, each shareholder must have paid at least one quarter of his contribution. [] 22]

With this cash contribution, Holding GmbH is now able to establish the operating subsidiary GmbH. The procedure for this is exactly the same as for the establishment of the holding company, with the difference that the holding company acts as the sole shareholder of the subsidiary and manages it, represented by the managing director of the holding company.

It is also possible to carry out the parent insert by material or mixed insert. In this case, assets such as shares in companies, land, receivables or the like are brought into the company in order to meet the ordinary contribution. [24] However, unlike in the case of a cash contribution, the contribution in kind must be accompanied by a report on the incorporation in kind, in which the assets deposited are listed and described in more detail. [25] Further necessary financial resources can be provided by the Holding GmbH, for example, also by contributions to the capital reserve or by granting loans.

2nd combination of existing company and newly founded holding company

If a holding structure is to be created in which the operating company already exists, only the holding company has to be founded. This is the same procedure as when the holding company was founded in the previous chapter. Once the holding company has now been established, the participation relationships are as follows. The taxable person as a natural person holds 100 % of the shares in the newly formed holding company and the number of shares in the operating company that he previously held. However, since it is not the natural person but the newly formed holding company that is to hold the shares in the operating company, the operating company is now transferred to the holding company by the taxpayer. [26] In the event of the formation of a holding company in which the subsequent subsidiary already exists, it is possible for the shareholders to contribute their shares to the company by way of a contribution in kind in return for payment against the granting of new shares or free of charge.[27] Therefore, the shareholders do not have to raise further cash to set up the holding company.

These procedures and the resulting tax effects are discussed in detail in chapter C.I.2.

Forms of holding structure from existing companies

Just as with the inclusion of an existing company in a newly founded holding company, the procedure is followed if both companies, i.e. the operating company and the holding company, already exist. The only difference here is that no new holding company has to be founded anymore, but only the operating company has to be brought into the existing holding company.

If shares in subsidiaries of a holding company or in the holding company itself are to be sold, strict civil law regulations must be observed. Assuming that the subsidiary or the holding company is a GmbH, the sale of these shares is regulated in § 15 GmbHG. The principle of the free resaleability of shares shall apply. This principle stipulates that shares in a GmbH can in principle be sold freely by any natural person, but also legal person, to any other natural or legal person. [28] This principle therefore also allows a holding company to sell shares in subsidiaries both to other companies and to natural persons. In practice, however, the legal regulations are modified by social contract regulations.

The sale of GmbH shares is to be divided into commitment and disposal business.

The commitment transaction here constitutes any contractual agreement which obliges the seller to transfer the shares. However, the legal force of this undertaking is subject to certain formal requirements. § 15 para 4 GmbH stipulates that any contractual agreement which obliges the transfer of GmbH shares requires the notarial form. [] 29]

The assignment contract represents the disposable business. The assignment contract is regulated in §§ 398 in the V.V.m. 413 BGB. § 398 BGB regulates the assignment of claims by an assignment agreement.

In principle, however, § 398 BGB applies exclusively to the assignment of claims. However, § 413 BGB stipulates that the possibility of assigning claims laid down in § 398 also applies to the assignment of other rights if no conflicting provisions are provided.[30] § 413 BGB hereby includes the transfer of company shares or an entire company into the circle of things that can be assigned to other persons. [] 31]

In addition, the assignment contract is only legally binding if it corresponds to the notarial form. [] 32]

Both in the commitment transaction and in the disposable transaction, the notarial form is therefore prescribed. This is expressly not a right to vote, but a duty. An exception to this is, however, in § 15 para. 4 S. 2 GmbHG, according to which a non-notarized agreement for the obligation of assignment of shares is nevertheless valid, provided that the assignment agreement according to § 15 para. 3 GmbHG has the notarized form.[33]

In addition, it is possible to attach further conditions to the assignment of company shares by means of the social contract. The most common example here is the so-called “permission requirement”[34]. If such an approval requirement is enshrined in the articles of association, all members must give formal consent to the acquiring or selling person. This consent is also given if it is made by implicit action. An example of this would be that the existing shareholders treat the new shareholder as such and include them in decisions. [35] If the conditions agreed within the framework of the articles of association are not fulfilled, the assignment is considered invalid. 36]

The process of sale remains the same regardless of whether shares in a subsidiary of the holding company or shares in the holding company itself are sold.

It is also possible to give shares to third parties. This is typically the case with so-called family holding companies. This is understood to mean holding structures in which several family members, such as parents and their children, are involved in a holding company. Here it happens that the family members give each other shares in the holding company. A classic example of this is when parents give the children shares in the family holding when they reach the age of majority. It is also common for parents in old age to give further shares to their children and thus hand over the family holding to the new generation step by step. The donation is in § 516 Abs. 1 BGB is defined as “a grant by which someone enriches another out of his assets [...] if both parties agree that the grant is free of charge”[37]. If shares in a holding company are to be given away, this donation is also bound by a formal provision. According to § 518 BGB, the form of notarial deed is prescribed for each donation contract. [] 38]

The tax requirements and effects of gifts are discussed in chapter C.III.2.

If a holding company in the form of a GmbH is to be terminated, this is done by the so-called liquidation. In the liquidation process, all assets of the company are sold and the existing debts are paid off. If, after completion of this process, liquid funds remain, they will be distributed among the shareholders. [] 39]

If a company is to be liquidated, a resolution is required in the first step, in which the shareholders decide by at least three-quarters majority to dissolve the company, the so-called resolution to dissolve. The three-quarters majority is necessary only if nothing else has been specified in the social contract. In this, a smaller majority, but at least the simple majority, or a higher majority can be determined. [] 40]

If a dissolution has been determined by a shareholder resolution, it must be registered for registration in the commercial register. This obligation to register pursuant to § 65 GmbHG is not addressed in principle to the previous representatives of the company, but to the liquidators pursuant to § 66 GmbHG.

Liquidators are the persons who take over the tasks of directors within the liquidation process. During this period, they are considered “the legal management and representative body”[42]. Unless otherwise determined, the previous managing directors are also considered liquidators.

In the case of liquidation of a GmbH held by the holding company, the holding company is therefore usually the liquidator; in the event of liquidation of the holding company itself, this role is assumed by the managing directors of the holding company. However, other persons may also be appointed liquidator under the articles of association or the resolution to dissolve. [43] The designated liquidators must also be filed for registration in the commercial register, regardless of whether only one or more liquidators have been designated. [44] Once this has been done, the company is in liquidation and must add the words ‘i.l.’ or ‘i. liquidation’ after the name of the company in order to make it clear to the outside world that the company is in liquidation. [] 45

The task of the liquidators or the liquidator is “to terminate current transactions, to fulfil the obligations of the dissolved company, to collect the claims of the latter and to convert the assets of the company into money”[46]. Traditional tasks are the sale of assets, the warning of open outgoing invoices and the settlement of open liabilities. In this case, the authorizations of the liquidators are limited to the fulfilment of the aforementioned liquidation purpose, unless otherwise stipulated by the managing directors or the articles of association. [47]

According to § 71 Abs. 1 GmbHG is a liquidation opening balance sheet at the beginning of the liquidation period and at the end of the advertising company a final balance sheet incl. prepare annual accounts. Since the liquidation opening balance sheet is based on the values of the final balance sheet of the advertising company, they do not differ in their values. Furthermore, liquidation does not exempt from accounting obligations until completion. It is therefore also necessary to draw up annual accounts for commercial law purposes at the end of each year within the liquidation period. [] 48]

The liquidation period is in accordance with § 73 para. 1 GmbHG limited to at least 1 year. Once completed, a final liquidation balance sheet shall be drawn up. This liquidation balance sheet can take place both before and after the distribution of the remaining assets of the company among the shareholders. [] 49]

After the termination of the liquidation period, this is in accordance with § 74 para. 1 GmbHG for registration in the commercial register. The company shall then be deleted. [] 50

The shareholding relationships of holding structures differ greatly from each other, as they are always dependent on the individual case. The simplest form of holding structure consists of two companies and a natural person. The natural person holds 100% of the shares of the parent or holding company, which in turn holds 100% of the shares of the subsidiary. This subsidiary carries out the operational business.

However, a holding company can have any number of subsidiaries in which it does not always have to hold a 100% interest. Thus, it is not necessary to specify in a flat-rate manner what the holding structure looks like in concrete terms. The only clear statement and at the same time condition for the creation of a holding structure is that the holding company holds shares in at least one subsidiary and can determine the actions of the subsidiary.

This chapter presents and explains four typical forms of holding companies. Here, the typical areas of application and the scope of the activities of the operating holding company, financial holding company, management holding company and organisational holding company are discussed.

1st Operating Holding

The first typical form is the operating holding company. This typically occurs in large companies. As the name suggests, in this form the holding company itself operates operationally and provides services on the market. In this case, the subsidiaries serve, for example, the purpose of supporting the parent company in the provision of services, to produce additional products or to ensure distribution in other regions as a branch office in Germany, but also abroad.

This form of holding is also known as the parent company. [] 51]

2nd financial holding

However, if the holding company itself does not operate operationally and serves exclusively the purpose of managing company assets, this is referred to as a financial holding company. The financial holding company is also characterised by the fact that it does not control the subsidiaries. The financial planning of the subsidiaries is also carried out by the financial holding company to a limited extent at most. Since the financial holding company does not participate operationally in economic traffic, it usually includes little to no staff. The main purpose of the financial holding is to finance the subsidiaries and consolidate their profits. [] 52]

3. management holding

The management holding company is also not operating. The aim of management holding is the decentralization and distribution of tasks among the subsidiaries. The holding company itself only takes strategic decisions that affect the subsidiaries, but does not involve them in the operative business of the subsidiaries. [53] In addition to the strategic decisions, the management holding company also fulfils the purpose of distributing capital to fulfill the tasks of the subsidiaries.

4th Organizational Holding

The organizational holding, or structural holding, serves the purpose of structuring a company. For example, a company is divided into a production company that deals exclusively with the production of new products and a sales company that is responsible for the distribution of these products. Which of the companies assumes the role of the holding company depends on the respective situation. It is also possible that the business areas of several companies, such as a production company and a sales company, are combined in one holding company. Only the parent company acts externally. If risky projects are planned, they can be transferred to a subsidiary. If the project fails, the remaining subsidiaries and the holding company remain financially unaffected. The purpose of an organizational holding company is therefore the internal structuring and organization of the various subsidiaries. [] 54]

If a holding structure is to be created, there are some tax peculiarities. A distinction must be made here as to whether the operating company and the holding company do not yet exist in order to create the holding structure, i.e. whether the operating company already exists or whether both companies already exist.

1st establishment of two companies to create a holding structure

If a holding structure is to be created in which neither the holding company nor the operating capital company exists, both companies must first be founded in advance.

Now, however, it is also conceivable that the operating company already exists as a sole proprietorship or partnership and should be integrated into a holding structure in the long term.

In order to be able to use the tax advantages of a holding company, the sole proprietorship or partnership must first be brought into a corporation.

If a business or a branch of business is transferred to a corporation and the contributor receives shares (in kind)[55], special valuation rules apply. [] 56

Holding GmbH must value the transferred assets with the common value. If further requirements are met, the book value or an intermediate value, maximum the common value, can also be used on request. [57] The recognition of the transferred assets at book value ensures that any hidden reserves that may exist are not taxed during the transfer. [] 58]

If a business is to be transferred to the acquiring corporation, it is not necessary to contribute all assets. Although the concept of operation includes all intangible assets, all assets belonging to the company and all other objects, it is not obligatory to bring all these assets into the corporation.[59] It is only necessary to bring in “all essential operating bases”[60]. The term “essential operating bases” is not clearly defined here and can be determined depending on the individual case. [61] If the undertaking previously existing as a partnership or sole proprietorship has been incorporated into the limited liability company, the principle laid down in the following chapter shall apply.

2nd combination of existing company and newly founded holding company

If a holding structure is to be created in which the operating company already exists, the holding company must first be established as explained in chapter B.I.2.

If both companies now exist and the shares in these are in the private assets of the natural person, the shares in the operating company must now be transferred to the operating assets of the holding company. The procedure to be followed depends on the number of shares the shareholder holds in the operating company.

If the shareholder holds more than half of the shares in the operating company, the shareholder can contribute his participation to the holding company in a tax-neutral manner. For this purpose, he must carry out a qualified share exchange in accordance with § 21 UmwStG.

An exchange of shares is understood to mean the transfer of shares in one company to another company, which in return grants the transferor new shares in the acquiring company, in this case the holding company. 62]

A prerequisite for a share exchange is that both the transferred and the acquiring company have the legal form of a corporation or a cooperative society.

In principle, the shares transferred with the common value are transferred to the operating assets of the holding company and valued. However, if the shareholder has more than half of the shares of the operating company and thus the majority of the votes, the shares may also be recognised at a lower value, such as the book value. [63] This is referred to as a qualified share exchange.

However, for a share exchange to qualify as a qualifying share exchange, some requirements must be met. On the one hand, the acquiring company must have more than half of the voting rights in the acquiring company after the exchange of shares; on the other hand, the ‘other consideration granted in addition to the new shares may not exceed [...] 25 % of the book value of the shares transferred or EUR 500 000, but not more than the book value of the shares transferred’[64]. [] 65]

The advantage of a qualifying share exchange is that it makes it possible to recognise the transferred shares not at common value but at book value or a higher value, but not above the common value.

If the book value is used, it is possible to avoid the taxation of any hidden reserves.

If, for example, the shares are to be continued with the book value, this is in accordance with § 21 para. 1 S. 2 UmwStG. Only the acquiring company is entitled to make such an application. [66] According to § 21 para 1 S. 3 UmwStG, the same requirements apply to the application for recognition with values deviating from the common value as for the application according to § 20 para. 2 No. 3 UmwStG. According to this, the application must be submitted by the acquiring company to the tax office responsible for that company and before the first final tax balance sheet is submitted after the takeover of the company shares. [] 67

From a tax point of view, the recognition of participation at book value gives a great advantage over the recognition at the common value. As a general rule, the shareholder must tax the capital gains arising from the contribution of the shares in the operating company to the holding company as capital gains under § 17 EStG. The gain on sale is determined by reducing the sale price by the acquisition costs and the disposal costs. [68] In the event of the exchange of shares, the sale price corresponds to the value of the shares granted by the holding company in return for the transfer.

A capital gain taxable thereafter is taxable according to § 17 EStG with the partial income procedure. [69] Here, 60 % of the capital gains are taxed at the personal income tax rate of the shareholder. The remaining 40 % remain tax-free under § 3 No. 40 EStG.[70] However, if the shares are contributed with the book value, the shareholder will only receive new shares in the holding company in the amount of the book value. Its acquisition costs correspond to the acquisition costs of the shareholder’s shares in the operating company. Thus, in this case, there is no capital gain, but the deduction of the capital costs may even result in a tax loss.

However, if the shareholder holds less than half of the shares in the operating company, a simple exchange of shares must be carried out. A simple exchange of shares is understood to mean when shares in a corporation are transferred to another corporation, for which purpose the transferor receives new shares in the acquiring company and any other consideration. The difference with the qualifying share exchange is that the acquiring company holds less than half of the voting rights of the transferred company after the share exchange. [] 71]

The acquiring company, just as in the case of a qualified share exchange, can only be a corporation or a cooperative. [] 72]

A simple share exchange, unlike a qualified share exchange, cannot in principle be carried out tax-neutrally. This is due to the fact that the contributions pursuant to § 21 Abs. 1 S. 1 UmwStG should in principle be set at the common value. This creates a capital gain for the transferor under § 17 EStG, provided that the common value exceeds the book value of the transferred shares. This results from the calculation scheme of the capital gain after the capital gain, i.e. in the case of the exchange of shares, the common value of the shares transferred, which corresponds to the shares received in the acquiring company in return for this and the other considerations, is reduced by the acquisition costs of the shares transferred and the costs of sale. It should also be noted here that in the case of use of the partial income procedure, the costs of sale may only be estimated at 60 %. [73]

For example, if the natural person A has a shareholding in operative B GmbH in the amount of 100% and with a book value of €25,000.00 and also holds 100% in C Beteiligungs GmbH, a non-operational holding GmbH, with €25,000 share capital, into which he would like to contribute the shares in B GmbH, A carries out a qualified share exchange. If A decides not to apply for recognition at book value, A contributes the shares in B GmbH at the common value (in this case € 50,000.00) to C Beteiligungs GmbH. In return, A will receive new shares in C Beteiligungs GmbH worth €50,000.00. Due to the share exchange, he incurred costs of € 1,000.00.

The capital gain is now calculated as follows:

Sale price 50,000.00 €

– Cost 25,000,00 €

– Divestment costs 1,000,00 €

= Capital gain 24,000.00 €

A capital gain of € 24,000.00 has now been incurred, which A has to tax according to the part income procedure. 60% of the capital gain, i.e. 14,400.00 €, is taxable with the personal income tax rate of A. Based on an income tax rate of 35 %, this results in an income tax burden of € 5,040.00. For the sake of simplification, this and subsequent chapters ignore the solidarity surcharge and church tax.

However, if A decides to apply for recognition at the book value of the shares, taxation of the hidden reserves can be avoided.

A exchanges shares at book values and contributes the shares in B GmbH at book value (in this case €25,000.00) to C Beteiligungs GmbH. In return, he receives new shares in C Beteiligungs GmbH worth €25,000.00, which represent the fictitious sale price of the shares. As in the aforementioned example, A incurs a sale cost of € 1,000.00. The capital gain here is calculated as follows:

Sale price 25,000,00 €

– Cost 25,000,00 €

– Divestment costs 1,000,00 €

= loss on sale € 1,000.00

If A executes the share exchange at book values, there is no taxable capital gain, but even a small loss. In this case, no tax burden arises at A due to the share exchange. It is therefore more tax-efficient for him to contribute the shares with book value to the holding company.

If shares in one corporation have been transferred to another corporation below the common value, they cannot be resold without tax consequences. The shares transferred to a holding company and the shares in the holding company received by the shareholder in return are subject to a seven-year blocking period. This provision is in § 22 para. 2 UmwStG and stipulates that ‘insofar as shares transferred in the form of a contribution in kind (§ 20 para 1) or a share exchange (§ 21 para 1) are sold directly or indirectly by the acquiring company within a period of seven years after the date of the transfer, the profit from the transfer shall be taxed retroactively in the marketing year of the transfer as the profit of the transferor from the sale of shares’[74].

If, therefore, the shares transferred are sold by the acquiring company, in this case the holding company, within the seven-year blocking period, the resulting profit is taxable on the person making the contribution. This profit is known as contribution profit II. However, profit II is taxable not in the year in which the shares were sold by the acquiring company, but in the period in which the shares were transferred to the acquiring company. [] 75

When calculating the profit of the transfer II, the so-called “smelting down” according to § 22 para. 2 S. 3 UmwStG to be observed. ‘smelting-down’ means the effect after which the contribution gain II is reduced by one-seventh for each completed year after the contribution in which the shares have not been sold. Relevant here is not the calendar year, but the time year.[76] The transfer profit is thus determined by reducing the common value of the shares transferred to the holding company at the time of the transfer by the costs incurred directly as a result of the transfer and by the value of the shares received in the holding company in return for the contribution of the shares to the holding company, but at most by the amount of the hidden reserves contained in the transferred shares. The melting is now still to be applied to the resulting amount. This is therefore to be reduced by one-seventh for each year in which the shares have not been sold. This sum now represents the contribution profit II and is taxable accordingly at the person making the contribution.

The transfer profit II leads to income according to § 17 EStG, i.e. profits from the sale of shares in corporations, and is therefore taxable according to the general rules of § 17 EStG. This income is usually taxed by the partial income procedure. Here, 60 % of the capital gain is subject to the taxpayer’s tariff income tax rate. The remaining 40% remain tax-free.[79] This is according to § 17 Abs. 1 EStG is always the case if the level of participation in the last 5 years was above 1%. If the shareholding was less than 1 %, the profit of the contribution II is in accordance with § 20 para. 2 EStG with the withholding tax rate or on request the lower income tax rate.

This is explained in more detail in the following paragraph using an example.

On 01.06.2018, natural person A contributes its shares in operative B GmbH with a common value of € 150,000.00 to C Beteiligungs GmbH and receives shares in C Beteiligungs GmbH with a book value of € 125,000.00. You incur costs for the contribution i.H.v. 5.000,00 €. On 01.08.2021 C Beteiligungs GmbH sells its shares in B GmbH. In this case, the transfer profit II for person A is calculated as follows:

Common Value Shares contributed €150,000.00

– Costs of submission 5,000,00 €

– Value of shares in C Beteiligungs GmbH € 125.000,00

= 20.000,00 €

– Meltdown at 3/7 €8,571.43

= Profit II 11.428,57 €

Person A must now tax profit II retroactively in the assessment period 2018 with the parts income procedure. Since only 60% of the profit is subject to income tax, €6,857.14 must be subject to the tariff income tax of the A. If an average income tax rate of 35% is assumed, this results in an income tax burden of €2,400.00.

If, however, not all the shares are sold in total, but only a part of these shares, the contribution profit II is reduced accordingly.

If C Beteiligungs GmbH sells only 60% of the shares in B GmbH, the profit of the contribution II must be reduced by 40%. [] 80]

If a share exchange has been carried out, a further obligation arises within the term of the 7-year blocking period. Since a sale of the shares transferred to the holding company or the shares received in return by the holding company within the 7-year blocking period would entail ex post taxation of the share exchange, it must be demonstrated annually that these shares were not sold in the previous year. This obligation of proof lies with the submitter. Within the 7-year period each year until the expiry of 31.05., he must provide proof that the transferred shares and the shares received in return have not been sold. If this proof is not provided, the aforementioned units shall be deemed to have been disposed of on the date of the day following the submission, if this proof was not provided in the first year, or on the calendar day of the following year, for the year for which the proof was not provided. [] 81]

The person who contributed the shares to the holding company is obliged to provide this proof. This applies not only to the shares which the transferor has received from the holding company, but also to the shares which the transferor has contributed. He is therefore obliged not only to prove what happened to his own shares, but also what happened to the shares contributed. [82] In the aforementioned example, the natural person A would therefore be obliged to prove that he has not sold the shares in C Beteiligungs GmbH and that C Beteiligungs GmbH has not sold the shares in B GmbH.

Forms of holding structure from existing companies

If both the subsidiary and the subsequent parent company already exist, from which a holding structure is to be formed, is to proceed analogously to the steps explained in the previous chapter.

The only difference here is that no company, whether a subsidiary or parent company, has to be founded, but here only the subsidiary, in accordance with the conditions and regulations laid down in the previous chapter, must be incorporated into the existing holding company. The two independent companies thus form a holding structure.

This chapter explains the differences and tax peculiarities of taxation of companies in a holding structure using the following example.

1. At the level of the subsidiary

2. At holding company level

If profits are distributed by the operating subsidiaries to the parent company, these profits are generally taxable in the year of receipt of the distributions, also at the level of the parent company. However, the taxation of profits distributed to a GmbH differs greatly from the taxation of profits distributed to natural persons.

If, in comparison, dividends are distributed to natural persons, they are subject to § 32d para. 1 EStG of the withholding tax i.H.v. 25 %,[92], or are subject to the partial income procedure according to § 32d para. 2 No. 3 EStG i.V.m. § 3 No. 40 EStG. [93] Since only 60% of the dividend is taxed in the partial income procedure, a personal income tax rate of, for example, 35% results in a tax burden of 21%. The maximum tax burden arises in the partial income procedure at an income tax rate of 45 % and is 27 %.

However, the provisions of §8b KStG do not apply to any distribution of profits by corporations to other corporations. According to § 8b para 4 S. 1 KStG, the provisions of §§ 8b para apply. 1 and 5 KStG only if the receiving company at the beginning of the respective financial year was at least 10% in the performing company.[94] If the participation is therefore less than 10%, the dividend income is taxable both with corporation tax and with business tax. The tax burden on this is 31,625 %.

However, if the amount of the shareholding is more than 10 % but less than 15 %, only the provisions of the Corporate Tax Act apply. This is based on the fact that according to § 8 Abs. 5 GewStG the dividend income is first added to the business income, but this then if necessary. § 9 No. 2a GewStG can again be reduced by dividend income, provided that the amount of the holding of the receiving company in the performing company is at least 15 % at the beginning of the survey period.

If Müller Vertriebs GmbH were to pay a dividend of €100,000.00 to Müller Beteiligungs GmbH, only €5,000.00 would be taxed at the level of Müller Vertriebs GmbH. With an income tax burden of 31.625%, this then results in a tax burden of 1.581.25 € on a profit distribution of 100.000.00 €. This corresponds to a tax rate of 1.581%.

If, on the other hand, Schmidt & Müller GmbH pays a dividend of €5,000.00 to Müller Beteiligungs GmbH, only 5% of the dividend, i.e. €250.00, is subject to corporate tax, but 100% of the dividend is subject to trade tax. This is due to the fact that Müller Beteiligungs GmbH holds 12 %, less than 15 %, but more than 10 % of the shares in Schmidt & Müller GmbH. Thus, the corporate tax at the level of Müller Beteiligungs GmbH in this case amounts to 15 % of € 250.00, i.e. € 37.50, and the trade tax amounts to 16.625 % of € 5000.00, i.e. € 831.25. This results in an income tax burden of € 868.75 on a profit distribution of € 5,000.00, which corresponds to a tax rate of 17.375 %.

The highest percentage of taxation in the profit distribution of Schmidt Vertriebs GmbH. If this dividend pays €20,000.00 to Müller Beteiligungs GmbH, the full €20,000.00 is subject to both corporate tax and trade tax. The dividend is subjected to a tax of 31.625 %, which results in an income tax burden of 6.325.00 €.

Thus, it is desirable to hold a shareholding of at least 15% in order to reduce the dividends by only approx. 1.5% tax and, as a result, 98,5 % of the dividend as liquid funds to be able to reinvest or use it in the long term. The possibilities that arise here will be discussed in more detail later in Chapter VII.

When distributing profits, however, a special feature must be considered. If a company is transferred to a holding company or acquired by the holding company, it is not advantageous to distribute the profits of the subsidiary to the holding company in the year in which the holding relationship was established. Although it is permissible to distribute directly to the parent company the profits of the current year as well as profit carried forwards from periods before the acquisition or contribution, this has the following tax disadvantage. [] 95

If profits from subsidiaries are distributed to the parent company, they are subject to § 8b para. 5 KStG only 5% of the profit distribution of corporate tax. § 8b Abs. 4 S. 1 KStG states, however, that this only applies if the participation at the beginning of the calendar year was at least 10 %. Thus, if the shareholding was acquired under the year, the profit distribution would not be 95% tax-free.[96] However, this is due to § 8b Abs. 4 S. 6 KStG is not the case. This stipulates that an under-year "acquisition of a participation of at least 10 percent is deemed to have taken place at the beginning of the calendar year"[97]. Thus, the tax privilege is restored in the corporate tax and the dividend is only 5 % corporate tax, even if the shareholding was acquired or contributed during the year. [] 98]

However, this is different in the case of trade tax. Here, too, the profit distributions of a subsidiary are in principle only 5 percent subject to taxation. This is regulated in § 9 No. 2a S. 1 GewStG. [99] In contrast to the Corporate Income Tax Act, there is no provision here that requires dividends from shareholdings acquired during the year to be considered as acquired at the beginning of the calendar year. However, since § 9 No. 2a S. 1 GewStG stipulates that dividends are reduced to only 95% “if the shareholding at the beginning of the collection period was at least 15 percent of the share capital”[100], these are subject to trade tax in full if profits are already distributed in the year of acquisition.

The following paragraph explains this in more detail using an example.

The natural person A holds 100% of the companies X Holding GmbH and Y Produktion GmbH. Y Produktion GmbH has a profit carried forward from previous years of €100,000.00 and also generates a further €20,000.00 profit in 2020. In August 2020, A will contribute its shares in Y Produktions GmbH to X Holding GmbH through a qualified share exchange. A would like to distribute the profits carried forward by Y Produktion GmbH to X Holding GmbH as early as possible in order to continue investing with this capital.

A decides to pay the €100,000.00 to X Holding GmbH in October 2020. Here, € 5,000.00 is subject to corporate tax i.H.v. 15%. The result is a corporate tax burden of € 750.00. However, at business tax level, since the shareholding did not exceed 15 % at the beginning of the assessment period, the entire distribution of profits is taxable. The full €100,000.00 is subject to the trade tax i.H.v. about 15%. This results in a total tax burden of 15,750.00 €. X Holding GmbH thus receives only €84,250.00 in liquid funds in order to continue investing.

If A waited until January 2021 and only then distributed the profits, only 5% of the profit distribution would be subject to both corporate and business tax. This results in a total tax burden of 1,500,00 €. X Holding GmbH thus receives €98,500.00 and thus €15,250.00 more in liquid funds compared to the profit distribution in the year of acquisition.

This clearly shows that, if possible, the distribution of profits to a holding company should be waited until the year of the acquisition of the shares is over.

3. At shareholder level

If Müller Beteiligungs GmbH then pays out a part of the profit of € 10,000.00 to Mr. Müller, there are two options for taxation.

Dividends of a corporation represent income from capital assets in the case of natural persons[101], which in principle are subject to § 32d para. 1 EStG with a separate income tax rate of 25 %. If capital income is taxed with capital gains tax, a general advertising fee, the savings lump sum, i.H.v. € 801,00 or € 1602,00 in the case of joint investment. Recognition of actual advertising costs is not possible.[102]

The distribution of profits i.H.v. € 10,000.00 is therefore reduced by € 801,00 due to the savings lump sum and then subject to capital gains tax. This results in a tax burden of 2,299,75 €.