A holding company is an empty corporation (usually in the legal form of a GmbH) that does not have an operational business. Holding GmbH primarily focuses on holding and managing investments in other companies. This means that the holding company is only involved in other companies (mostly also in the legal form of the GmbH).

In contrast to other countries, there is no legally terminated term of holding company in the Federal Republic of Germany. The holding company is an organizational structure, not a special form of company regulated by law. [1] The “holding” is an Anglicism that results from the word “to hold”. From this word, the purpose of a holding company can now be derived. This consists in the holding of holdings of other companies. [2] As a rule, this is also the only purpose of society. Operating companies are divided into the company.

The holding is characteristically based on the characteristics according to § 271 para. 1 HGB[3]. An example would be the transfer of capital to another company and the participation in the profit or loss of the investee company. [] 4]

1.2. selection of the parent company; Partnership vs. Capital Company

The holding company is not defined by law. It can therefore have any form of society. If one now considers partnerships and corporations, there are differences in the respective structure, which affect not least the taxation of the individual companies, ultimately also the shareholders of the holding company. The establishment of the respective holding company follows the individual laws on its respective establishment. [] 5]

The decision on the respective legal form of the holding company is determined by various criteria, which play a decisive role, as with every company formation. One example is the decision on the limitation of liability of entrepreneurs / shareholders, the influence they would like to exercise in each case and, last but not least, the possibility of raising capital of the respective legal form.

In the following, the comparison of a partnership, here the GmbH & Co. KG, and a corporation, by way of example the GmbH, will now take place. Individual companies are disregarded due to the development of a "family holding".

First of all, the selected company is founded according to the special laws, e.g. the GmbHG, HGB, BGB, AktG, etc. Costs of establishment play a rather minor role when setting up a holding structure, since the effort is not implemented accordingly for small companies and usually has a minimal share of the result for larger companies.

One of the larger aspects of the choice of legal form is the limitation of liability. Limitation of liability should refer to the effect of, for example, insolvency on the private assets of the shareholders, liability to third parties. Questions of tax liability according to e.g. §§ 69, 70 AO and § 42 d EStG should not be discussed because of complexity. The impact of the respective legal form on the different tax types will be explicitly examined in more detail in the later points.

First of all, let us deal with the limitation of liability of the respective form of company. All partnerships are generally not limited in liability. The partners or co-entrepreneurs are liable personally, in solidarity and directly and unrestrictedly for the liabilities incurred by the company.[6] They cannot limit their liability in the external relationship. Due to this fact, however, a mixed form of the KG is often chosen, namely the GmbH & Co. KG. The GmbH is personally and fully liable as a general partner, but the liability is limited to its share capital. The limited partnership partners of the limited partnership are only personally and unrestrictedly liable with their unpaid limited partnership contribution.

On the other hand, corporations are their own entities whose liability is limited; at the GmbH, by way of example, as mentioned above, on the company assets which are made available to the company by their respective shareholders at the time of foundation. The basis is the share capital to be paid up with a minimum nominal amount of twenty-five thousand euros.

1.3. Creation of the holding structure

As a rule, the holding company is usually established by a cash foundation. Cash is contributed to the company’s assets. With the transferred capital, further investment companies can then be acquired. If the incorporated company is a corporation, special regulations may apply to it, such as requirements for the company’s articles of association. [7]

Another possibility of founding is the foundation of the holding company. The contribution is made in the form of property, rights or other assets and is transferred to the company assets. In this context, it is crucial that the depositor of the company secures the permanent power of disposal of the depository. [] 8]

These two founding possibilities describe themselves as the “original” establishment of the holding company. [9] It does not matter whether the foundation was only made by material or bar foundation. A mixed form of foundation is also permitted. [] 10]

On the other hand, the term “derivative” foundation can summarize all possibilities that German company law has determined. In particular, the division and merger in accordance with the Conversion Tax Act should be mentioned as a priority. [] 11]

The above-mentioned possibilities for founding are the same for each holding structure. If one speaks of a double-storey holding company, this means that the company founded as the second company acquires all new shares and not the upper company. The upper company is founded by family members.

As mentioned, the following corporate structure is now available for further processing: The upper company of the double-storey family holding company is a GmbH & Co. KG, which is founded by the family members who are to be involved in it. Subsequently, an intermediary company in the form of a GmbH is connected, which establishes the double-storey holding structure. All other operating companies will now be divided into the GmbH.

2.2. Income Qualification

Let’s first look at the shareholders of GmbH & Co. KG. The profit shares of the shareholders are attributed to income from commercial operations in accordance with § 15 (1) no. 2 EStG. The company is not recorded as an independent tax subject, but the shareholders are subject to income tax. [12] In contrast to limited liability companies, partnerships are governed by the principle of transparency, so that shareholders are called upon to tax. In trade tax, however, companies are classified as limited taxable. As a result, companies have to impose their profits on trade tax, not the shareholders. [13] The justification for trade tax liability presupposes that it is a commercial partnership. [14] The GmbH achieves, insofar as it meets the requirements of § 1 Abs. 1 No. 1 to 3 KStG, always income from business operations. [15]

2.3.

Ideally, every company generates profits in the holding structure. These are then first distributed to the intermediate holding in the form of a GmbH. The distribution will then take place under the conditions of § 8 b Abs. 4 KStG i.V.m. § 8 b Abs. 1 KStG tax-free and is not included in income.

As a prerequisite, the participation immediately amounts to more than 10 percent of the share capital at the beginning of the calendar year. [16] Sog. Free float dividends are ignored.[17]

However, it is now the case that according to § 8 b para. 5 KStG five percent must be added to profit as non-deductible operating expenses. Depending on how many companies are affiliated, this can add up to a high tax burden.

Another problem could be the exemptions of dividends in trade tax. Whereas profits from participation in partnerships are exempted without further conditions, problems can arise for corporations and their distributions.

The Trade Tax Act stipulates a different level of participation than the Corporate Tax Act. The participation does not have to be ten percent, as in the Corporate Tax Act, but fifteen percent. [18] The requirements specified for the respective law must be complied with if necessary. problematic, but can be circumvented.

On the other hand, there are more problems with a loss of a company. The losses in the holding structure cannot be offset against the profits of the other companies. However, it can only be established as a loss carry-forward. [] 19]

These can then be offset against any profits in the following years. However, this leads to companies not paying tax on their actual profits of a group of companies.

In order to be able to make a vertical profit and loss account, it is possible for affiliated companies to have combined taxation carried out under certain conditions. The possibility arises from the establishment of an organ. The organization is subject to the requirements of § 14 KStG.

The organization also breaks through the taxation principles, according to which corporations are independent tax entities. [20] This makes it possible to offset the results of individual companies.

The organization offers the opportunity to conclude a profit transfer agreement with an affiliated company. The remaining conditions are fulfilled according to § 14 KStG.

The organ circle can be chosen freely and thus offers various possibilities of design. If, for example, a profit transfer agreement is now concluded with each subsidiary and the intermediate holding company, the entire offsetting of profits and losses is carried out at the level of the GmbH.

Through the organising body, the part of the non-deductible operating expenses in the amount of five percent according to § 8 b para. 5 KStG. All profits and especially losses of the company are collected in the organ carrier. The sponsor can then distribute any profit to the parent company.

Just as with the dividend exemption, it is the case with the capital gain of investments. The five percent non-deductible operating expenses according to § 8 b para. 3 KStG are also circumvented. In the case of divestments of companies, this may well represent a considerable amount.

The advantage in the structure mentioned at the beginning results from the fact that the GmbH forms a kind of hedge for the upper company. If the case now arises that one of the subsidiaries receives an order for auditing and a surplus result is formed from it, this is taken into the subsequent taxation at the GmbH, but nothing changes at the level of the shareholders.

The shareholders, however, cannot offset any losses from the group of companies with other profits assigned to them, such as those arising from the letting and leasing. This could be solved by an organ circle that also includes the upper society. The only problem with the selected structure is that losses that would result from the group of companies have to be compensated by the organ carrier. Therefore, the chosen legal form of GmbH & Co. KG is also advantageous, since the GmbH as a general partner is limited in liability and the limited partners are only liable with the part of their unpaid contribution.

A further problem, however, is that the partnership must carry out a self-commercial activity. This is not the case with a pure holding company.[21]

This can still lead to a negative capital account for the limited partners[22] and thus no profits can be offset. It also follows from this that any sale or cessation of the limited partnership generates a taxable profit [23] which is taxable.

Another negative aspect of the organization can be the decline or reduction of the loss carry forward of the individual companies. However, this is only the case if the institution is not created by acquiring the shareholding but by changing forms and separation. [] 24]

2.4. Exit taxation

Exit taxation is the advance taxation of hidden reserves, on which the Federal Republic of Germany loses the right to tax if it is delayed abroad. A sale in accordance with § 17 EStG is fabricated. This mainly concerns shares in corporations. The regulations for this are laid down in the Foreign Tax Act. [] 25]

If a shareholder moves abroad, he is only subject to limited taxation on the income earned by him in Germany. As a rule, this also includes the sale of shares in a German corporation. [] 26]

However, it is often the case that various double taxation agreements lose the right of the Federal Republic of Germany to tax the sale of shares. [] 27]

On the other hand, it is not a problem insofar as the participation is a co-entrepreneur share in a partnership such as the aforementioned GmbH & Co. KG. No exit taxation is triggered insofar as the co-entrepreneur moves abroad.

3. inheritance tax

3.1. Exemption of operating assets §§ 13 ff ErbStG

Apart from the parameters that can be decisive for current taxation or e.g. limitation of liability, there is also another decisive criterion for the choice of legal form. For natural persons, this mainly has an impact on the inheritance/gift tax burden. [28] The privileges in §§ 13a, b ErbStG are regulated.

There are two types of asset conservation. On the one hand, there is the rule protection according to § 13 b Abs. § 13 a ErbStG[29], in which eighty-five percent of the operating assets are exempted, on the other hand the option exemption with one hundred percent exemption of the operating assets. [] 30]

Whereas shares in a co-entrepreneur partnership are at all times included in the privileged assets, shares in a corporation retain a minimum shareholding of more than twenty-five percent.

This difference offers the partnership significant advantages over the corporation.

However, this unequal treatment has led by judgment to §§ 13a, 13b and 19 ErbStG being classified as unconstitutional by the First Senate. [31] A new regulation of the legislative authority was demanded, but this has not yet been fully adopted.

Therefore, if you still go after the old regulation, there are various criteria that lead to a sparing of the operating assets. Particularly in the case of a holding structure, it is crucial that, if the companies have subsidiaries, the level of participation, if these are corporations, also hold at least twenty-five percent. It should also be noted that the company does not consist of more than fifty percent of administrative assets. [32] The problem here is that capital shares count as management assets unless at least twenty-five percent is held as a direct holding. [] 33]

This condition also requires that the holding companies do not consist of more than fifty percent of administrative assets. [] 34

4th Conclusion

In the present work, some points that can be used in various design possibilities of a family holding should be discussed. If you first look at the legal framework, there is no direct reference in the law for the holding concept. Reference is made to various individual tax laws. If one now considers setting up or building such a group of companies, it must address a variety of different factors and take into account the right structure in the decision-making process; Be it the choice of legal form of the parent company or intermediate company, the distribution of assets or the simple representation of the interests of individual shareholders can always give a new picture.

However, it should be noted that the purpose of a future holding structure can be strongly influenced, especially by the new decision and new regulation of the inheritance tax. The business aspects and the current taxation are less influenced for holding companies (e.g. TUI AG, Porsche Holding) than for family businesses that want to guarantee a permanent, tax-favorable company succession.