In order to transfer the shares of a GmbH to a holding company in a tax-neutral manner, you have to be creative as a minority shareholder. Because German tax law sees a tax-neutral contribution only from a participation rate of 51 % uncritical. Therefore, we as tax consultants are also inventive. In this article, we now introduce you to a somewhat exotic design in which a foundation is used instead of a holding company. The ideal is a family foundation.

1st Holding with GmbH for minority shareholders – Introduction

The vast majority of all corporations in Germany are GmbHs. This, in turn, includes most individuals. These so-called one-person GmbHs can be integrated relatively easily into a holding structure. All you have to do is make a conversion. More specifically, this is called an introduction. Fortunately, such a contribution is tax-neutral possible.

But what seems self-evident here is a bit more exciting when the shares are divided between two or more partners. Therefore, this time we look at what one can do as a minority shareholder of a GmbH with regard to the establishment of a holding company in order to avoid taxes in this process.

Why minority shareholders do not set up a holding company for their GmbH

Actually, German tax law allows the tax-neutral transfer of company shares to other companies. Since we are here in the chapter on the legal regulations, which we have to open before we can deal with the design, it should be noted that the conversion is actually a share exchange. § 21 UmwStG stipulates that, in principle, the new shares transferred should be valued at the common value. This therefore means the value that would be applied to a sale of the shareholding. However, since this is usually a value above the book value, it follows that the difference is subject to taxation. Therefore, only the share exchange at book values is tax-neutral possible.

Now, however, § 21 UmwStG stipulates that the exchange of shares at book values is permitted to the transfer of a majority of the shares in a corporation. For this reason, minority shareholders of a GmbH are basically at a great disadvantage when transferring their shares to a holding company because they would have to pay regular taxes on them. What alternatives are now conceivable?

3rd minority shareholder of a GmbH: Foundation instead of holding company as solution

A holding company offers a wide variety of advantages in holding and managing corporate investments. Even the very low-tax sale of a subsidiary from a holding company is tempting for many shareholders. But also the taxation of profit distributions is in most cases convincing, because associated with low taxes. Therefore, the question of whether one should exchange a holding company for another construct for the design of corporate structures is quite justified.

Therefore, as a tax consultancy firm with a focus on corporate tax law and conversion tax law, we have an alternative ready. Instead of setting up a holding company, minority shareholders can transfer their GmbH to a foundation. It will usually be a family foundation. Finally, the current profits of the GmbH should continue to be available to their entrepreneurs. And the fact that a foundation now distributes destination services instead of a holding company distributing dividends reveals a difference only with a detailed look.

Significantly greater differences arise when building the foundation compared to the holding company. Because a foundation receives the shares of the GmbH by way of a donation instead of a conversion. And that in turn means that we have to answer the question of the gift tax that goes with it. In fact, this is possible with the transfer of GmbH shares tax-free, because these are operating assets. Under inheritance and gift tax law, business assets are regarded as so-called beneficiary assets under certain, easily achievable criteria. Depending on the size of the company, the transfer of the shares to the foundation remains tax-free if it adheres to a blocking period of five or seven years. The number of employees and their average wages must also be approximately maintained. More importantly, the value of the shares must not exceed EUR 26 million. At higher values, you use the so-called protection requirements test instead, but this is again a separate topic.

4th Foundation as a minority shareholder of a GmbH: Taxation

The main difference to the holding company in a family foundation lies in the area of foundation, where the foundation is instead referred to as an establishment. But there are also some differences in taxation. For example, one can achieve with a foundation that it is subject to different taxation as a purely asset-management corporation. This is even done with a tax advantage. So you can avoid with a foundation at least the trade tax, but often also the corporate tax. In the case of a foundation as a minority shareholder of the GmbH, however, the advantage compared to an ordinary holding company is only 0.75% or 1.5%. And yet this is a small bonus that you are happy about.

In the taxation of payments to former shareholders, however, the Treasury receives capital gains taxes just as in the distribution of dividends from the holding company. In other words, a total tax of 25% must be expected at private level, plus any solidarity surcharge and church tax.

5th Alternative foundation instead of holding for minority shareholders – Conclusion

Time for a summary judgment: The problem that minority shareholders of a GmbH have with the establishment of a holding company can be elegantly circumvented with a foundation in their place. In fact, one or the other tax advantage opens up. Since this is only small, as a majority shareholder you should consider very carefully whether you should really form a comparable structure with a foundation from an already existing holding company. But there are also other alternatives for minority shareholders to consider. After all, a foundation is a very special construct.

What is especially special is that as a shareholder you hand over ownership of the GmbH shareholding and thus virtually control to the foundation. Therefore, it is all the more important that the statutes of the family foundation are really legally secure and above all very precisely oriented to the own ideas for the future handling of the GmbH shares. A holding company can be eliminated relatively easily, but a foundation is an almost transcendent vehicle. Even if subsequent changes to the foundation statutes are to be made, this is always associated with effort and further uncertainties. All this should therefore always be kept in mind when setting up a foundation.