A holding company usually has the legal form of a corporation (UG, GmbH or AG) and is simply established. For example, the classic holding GmbH has many advantages in taxing profit distributions and selling subsidiaries. Therefore, the Holding-GmbH is particularly often used by startups who are planning a later exit. This article shows all the advantages and designs.

As a rule, a holding structure consists of two limited liability companies (GmbH’s). One GmbH (holding company) holds 100% of the shares in the second GmbH (subsidiary company). The holding company itself is usually then held and managed by a natural person.

The sub-company can now become operational and generate profits, which are then subject to corporate and business tax of approximately 30% at company level. At this level, therefore, there is no difference from a normal GmbH, which is not in a holding structure.

Benefits of a Holding

2.1 Current taxation

The difference is evident when operative GmbH distributes your profits to your shareholder and the holding company (dividend). In this constellation, the provision of § 8b (1) KStG in conjunction with paragraph 5 KStG applies. It means that 95 % of the profits distributed by the holding company do not have to be taxed. 95% is therefore tax-free. The remaining 5% of the dividend remains subject to taxation of 30%. Therefore, only about 1.5% of taxes are paid on the distribution.

Especially in comparison with a corporate structure without a holding company, the tax advantage becomes clear. In the event that the natural person receives the dividend directly from operative GmbH, it will be taxed with 25% withholding tax. The legal person can claim a 95% tax exemption.

Due to the tax exemption for the holding company, this therefore remains much more capital that can be reinvested.

2.2. Sale of operative GmbH by the holding company

Holding companies benefit not only from distribution, but also from the sale of operative GmbH. The 95 % exemption also applies.

Operating GmbH has generated EUR 200,000 distributable profit and now wants to distribute it so that the shareholders can acquire a share in another company.

3.1. Taxation with holding company

Out of EUR 200,000 dividend, only 5% is taxable EUR 10,000. These are taxed at holding level at 30%, i.e. EUR 3,000 (= 1.5% effective tax rate). In addition, there is no tax. The holding company will be left with EUR 197,000 to acquire a share in another company or to invest in another way.

3.2. Taxation without holding

Out of EUR 200,000 dividend is 100% taxable. These are taxed at the level of the natural person at 25%, i.e. EUR 50,000. The shareholder remains EUR 150,000 to make further investments.

Through the interposition of the holding company, the shareholders effectively have EUR 47,000 more capital at their disposal.

Long-term strategic measures within the framework of a holding company

Of course, the dividend or capital gain is now almost tax-free in the holding company. A distribution of this tax-free profit to the shareholder (= natural person) would then trigger the normal capital gains tax of 25%. We have already described this taxation in an article on dividend taxation.

Therefore, various strategies are used in design practice, such as:

4.1. Reinvestments by the holding company

If only 1.5% tax is paid from dividends and capital gains, approximately 98.5% of the profit is available for reinvestment. Our clients use this particularly often for investments in other startups.

4.2. Immobilien-GmbH

If the holding GmbH is converted into a real estate GmbH, the rental income can be completely reduced by the so-called extended land shortening (§ 9 no. 1 sentence 2 GewStG) in the case of trade tax, so that the GmbH ultimately no longer has to pay trade tax. As a result, the rental income is only charged with 15 % corporation tax, which is significantly less than the real estate taxation in private assets (income tax rate 0-45 %).

4.3. Lending to shareholders

The liquid assets of Holding GmbH can also be granted to the shareholder (private person) as a loan. This then uses the liquid funds, for example, for the acquisition of real estate. Although foreign interest must be charged here, these are currently very low (1-2 %) and can also be tax deducted on a private level as advertising costs if you are used to finance a rental property.

Furthermore, the BFH decided in judgment of 11.07.2017 (Reference IX R 36/15) that the repayment of the loan by the shareholder must be secured. It is therefore important that the shareholder has sufficient assets to ensure repayment. In case of doubt, a land charge entry must be made in favour of the GmbH.

4.4. Pension payments

Each taxpayer can tax up to EUR 54,000 per year (as of 2018) with a tax rate of less than 42%. If the shareholder’s tax income falls on retirement, it is advisable to distribute part of the profit carried forward each year. For a profit distribution of, for example, EUR 100,000, 60% (= EUR 60,000) are taxable. This results from the partial income procedure according to § 32d paragraph 2 no. 3 EStG (see our blog post on profit distribution). By using the low tax rate, for example, an income of EUR 60,000 results in a tax of approximately EUR 15,000, instead of the normal withholding tax of EUR 25,000 (25% of EUR 100,000). You save EUR 10,000 per year.

In addition, all amounts for spouses invested together double, so that the distribution of EUR 200,000 leads to a total tax burden of EUR 30,000 instead of EUR 50,000.

4.5. moving away & distribution

Consideration can also come to a move to the foreign low-tax country. Subsequently, the profit carried forwards are distributed by the Holding GmbH and are generally taxable under foreign tax law. Depending on the respective DTA, Germany may withhold a capital gains tax of 10 %.

However, the company must return to Germany after five years at the latest in order to avoid the exit taxation according to § 6 AStG. Only then will the exit tax be waived.

4.6. Further arrangements for holding companies