For private companies, the entrepreneurs involved in them often pay the top tax rate. With the holding company, there is a way to reduce taxes by almost half. So anyone who wants to set up a holding company for his or her sole proprietorship and partnership can look forward to tax savings. However, this only applies insofar as the holding company saves or invests the profits. Because a profit distribution then accrues 25 % capital gains tax. But there are also tax-avoiding design possibilities for this. Especially in the area of real estate rental, a holding structure can generate great tax advantages. In any case, the holding company is clearly superior in terms of further asset accumulation both to a sole proprietorship and to any type of partnership. That is why we recommend establishing a holding company for individual companies and partnerships.

Individual companies and partnerships are grouped under the umbrella term partnerships. They share some remarkable characteristics. On the one hand, there is at least one person in both who is fully liable with their assets for the decisions and debts of the company. This may constitute a significant risk. On the other hand, the two partnerships share the taxation that takes place at shareholder level. The consequence is that for profits of around EUR 60,000 per person, the personal top tax rate applies.

Neither the one nor the other side effects that companies share are particularly tempting to us. There may be situations in which they are beneficial, but in general we have clear disadvantages that we would prefer to eliminate. So let's get to work, let's start a holding company for individual companies and partnerships.

In order to demonstrate this demonstration as impressively as possible, we accept Mr. Conrad Contratax as an entrepreneur who runs both a sole proprietorship and a partnership. The partnership is to be a GmbH & Co. KG. This makes it easier for us to get an overview of taxation. Because here we want to assume that the entrepreneur treats the GmbH involved in it with a shareholding of 0% in the KG only as a general partner GmbH, so that he has to tax the profits 100%.

In order to better investigate the tax effects, we estimate a profit of EUR 150,000 per year for the sole proprietorship and the partnership. With these key data, we now go the way and establish a holding company, in which we bring the individual company and the partnership.

The transformation of the sole proprietorship and the partnership is preceded by two start-ups. First, Mr. Contratax founds a GmbH. It will later be our holding company. With the share capital, the GmbH now founds another GmbH as a subsidiary. It is to take over the operational activities. For this purpose, Mr. Contratax brings the sole proprietorship into the subsidiary GmbH. Fortunately, according to the statutory provisions of the Conversion Tax Act (UmwStG), this is tax-neutral. However, this conversion process is associated with a seven-year blocking period.

With GmbH & Co. KG we can proceed in the same way. But we can also take over them as a subsidiary of the operating subsidiary GmbH. In terms of control, both variants have the same effect. The profits generated by this business unit either as part of the operative GmbH or as its subsidiary are subject to taxation at the level of the GmbH.

Which brings us to the advantages we get when we set up a holding company for Mr. Contratax for his sole proprietorship and partnership.

At the sole proprietorship, Mr. Contratax used to have to tax the profits on his income tax assessment. For a profit of EUR 150,000, the top tax rate was applied.

But before we calculate the income tax of Mr. Contratax on this basis, we must also take into account the profit of his partnership. Since he also had to declare 100% of the profit in his income tax here, his taxable income doubled in our example.

In addition, his sole proprietorship is said to have been subject to trade tax. Although Mr. Contratax was able to offset a large part of the trade tax with his income tax, a certain trade tax overhang is usually retained as a tax. However, we want to be generous here and therefore assume that the levy on trade tax is so low that there is no trade tax overhang, but that the trade tax paid is fully compensated by the deduction from the collective income tax.

Since we were already generous, we now calculate the income tax of Mr. Contratax with round figures. So if we assume a tax of 50%, taking into account the solidarity surcharge and a possible church tax, the tax is EUR 150,000.

In comparison, the taxation of profits as it accrues to the holding company. Initially, operative GmbH taxed the profits. As already mentioned above, it is irrelevant whether GmbH & Co. KG continues to exist as a company or also merges into operative GmbH. On the one hand, we are counting on a 15% corporate tax. On the other hand, there is also a trade tax on the GmbH. In realistic terms, let us also expect 15%. Thus, with a profit of EUR 300,000, we come to EUR 45,000 corporate tax and business tax each.

The remaining EUR 210,000 of the profit will now be distributed by the GmbH to the holding company. In principle, the holding company can receive this profit tax-free. After all, the profit was already subject to taxation at the level of the operating subsidiary. However, the legislature expects administrative costs, which still keep a small part of the profit taxable. Overall, this leads to a tax of 1.5% on the dividend received by the holding company. As an amount, this means a further EUR 3,150 in taxes.

So far, we have paid a tax of EUR 93,150. This is already significantly lower than the EUR 150,000 that Mr. Contratax had paid with his sole proprietorship and partnership.

With this EUR 206,850, the holding company can now do several things. She can simply park them in her bank account. There they are safe from any liability claims of third parties against the operative subsidiary GmbH. But she can also invest the money. This can be done, for example, by renting out real estate to third parties or their subsidiaries. Or the holding company distributes the profit it has accrued to its shareholder, Mr Contratax. In this case, however, there is a renewed taxation at the level of the shareholder. Dividends from a corporation are subject to capital gains tax at 25 %. Let's do the math:

EUR 206,850 x 25 % = EUR 51,712,50 capital gains tax

In addition, there is the solidarity surcharge and the church tax, which varies depending on the federal state. These additional levies should together amount to approximately EUR 6,000. If we round up Mr. Contratax’s taxes to an amount of about EUR 58,000 and add to the taxes incurred at the level of the holding and operative GmbH, the total taxes also amount to about EUR 150,000.

Well, we have two results here that we need to be clear about when considering the holding company as an alternative to sole proprietorship and partnership. On the one hand, the holding company is really beneficial as long as it does not pay out profits to the shareholders. It is therefore ideal for reinvesting profits and avoiding liability risks for accumulated profits. In this respect, the holding company stands out favorably both from the individual company and from any partnership.

We can use another advantage. Because as a corporation, we have significantly more options for how we can save taxes in other ways, but at least postpone them. For example, it is conceivable that Mr. Contratax has positioned real estate in a family GbR or an OHG (here the partnerships serve to avoid a business split if the real estate should be rented to the own corporations). He could now sell this to the holding company. In this way, he would get the money out of the holding company tax-free.

Real estate is again of interest in the internal rental within the holding structure. Because, if cleverly designed, they exclude the trade tax in the holding company through the extended land shortening pursuant to § 9 no. 1 sentence 2 GewStG, but on the other hand reduce the tax incurred with 30 % as an operating rental expense in the subsidiary, taxes are significantly saved at the level of the subsidiary.