A holding company is a corporate structure in which a parent holding company has only one task, namely to hold and manage the participation in other companies. This model is excellent for avoiding taxes. The taxation of dividends paid to the holding company and capital gains from the sale can be reduced to up to 1,5 %. Therefore, a holding company is recommended as an ideal investment both for the use of the profits as capital for reinvestment and for financial security in retirement.

In the video, we explain the tax benefits of dividends and divestments and other aspects of a classic holding structure.

1. The Nature of a Holding

A holding company is a corporate structure in which the participation in one or more operating companies is held in a company created specifically for this purpose. Thus, while the operating companies are responsible for tasks such as research, development, production and sales, the holding company involved in them has only one task, namely to hold and manage the holdings in the operating companies.

Setting up a typical holding company

Most holding companies are quite uniform in their corporate form. They consist of one or more operating companies in the legal form of a GmbH or, more rarely, a corporation in alternative form, and a GmbH as a holding company. Alternative corporations are also conceivable in the case of the holding company.

Now the question arises as to why it is advantageous in both cases to integrate a corporation into the holding structure. The answer to this is based on the tax advantages that corporations can claim for themselves compared to partnerships. In some exceptional cases, however, a partnership or even a permanent establishment may be more advantageous than a corporation. But this is only marginal. Let’s now look at the tax advantages of a holding company.

3. The Tax Benefits of a Holding

Advantage 1: Tax advantages of a holding on dividends

What most often benefits a holding company is the distribution of dividends by operating companies. In principle, it can be assumed that these profits are tax-free at the holding company. However, the Corporate Tax Act provides for a flat-rate deduction of the tax-free profit. It amounts to 5% and reflects the expense incurred by the holding company in holding and managing the holding (§ 8b (5) KStG); he is excluded from the deduction. In other words, 95 % of the dividends are tax-free and 5 % must then be taxed by the holding company with business tax and corporation tax. Since in both cases the tax rate is around 15 %, the total actual tax burden is around 1,5 % of the dividends (5 % x 15 % x 2 = 1,5 %).

However, since 2013 there has been a restriction on this extremely advantageous taxation. Taxation is based on the percentage of participation. If the holding company holds less than 10 % of the dividend, the holding company must pay full tax on the dividend. Only from a share of at least 15 % can the advantageous taxation in full be claimed. However, if the shareholding is between 10 % and 15 %, then at least 95 % of dividends are tax-free under corporate tax. In the case of business tax, however, there is no tax saving in this case. Again at a glance: