When you start a holding company, you are certainly looking forward to the first profit distribution that it will receive from its subsidiaries. But a little patience is needed. If you pay the profits to the holding directly after its establishment, then trade tax is payable in full. However, if you do not distribute profits to them in the year of the establishment of the holding company, but wait for the following calendar year, then the trade tax is only about 0.75% (the exact percentage depends of course on the lifting rate of the lifting municipality).

Founding of a holding company: observe trade tax

1. No profit distribution when establishing a holding company – Introduction

Those who strive for a tax optimization of their own corporate structure rarely miss the establishment of a holding company. After all, a holding company offers a variety of tax advantages. One of the most important tax advantages is the box privilege. Because if an operating subsidiary taxes its profits, then it should be allowed to transfer the already taxed profit to its parent company tax-free. Therefore, the German legislature has taken into account a principled tax exemption for corporate tax and business tax. But there are some prerequisites to consider. In fact, these conditions can lead to the holding company still having to pay taxes when receiving its first profit distribution.

For this reason, in this post we would like to discuss when this is the case. After all, no one wants to pay taxes when starting a holding company just because a profit distribution takes place to them right away.

No distribution of profits at the establishment of a holding: legal bases

On the one hand, we want to take a brief look at the Corporate Income Tax Act. Because on this basis we then make a comparison to the trade tax law. Although the Trade Tax Act largely follows the Corporate Tax Act with a view to avoiding taxation of already taxed profits, there are a few remarkable points that we would also like to consider. In particular, we note § 8b KStG and § 9 GewStG.

So let’s see why you should not pay out profits to them in the year of the establishment of a holding company. To this end, we consider the taxation that it would apply if dividends were nevertheless distributed to a holding company in the year of its establishment. In doing so, we will deal first with corporation tax and then with business tax.

3.1. Corporate income tax of the holding company in the year of its establishment

If you set up a holding company in 2022 to override it to an operating subsidiary, then it can basically collect the profits already taxed by the subsidiary tax-free. The restriction “in principle” is necessary here because the legislature provides for a lump-sum consideration of administrative costs in § 8b (5) sentence 1 KStG. These assumed costs are excluded from the general tax exemption. Fortunately, only a very small proportion of profit is subject to corporate tax, namely only 5%. With a tax rate of 15%, which is a flat rate for corporation tax, we have a corporation tax of just 0.75%.

However, it is important that the receiving holding company holds at least 10% of the subsidiary. Therefore, when considering why one should not distribute profits to a holding company in the year of its establishment, we want to assume that the holding company even has a 100% share in the subsidiary. This exemption condition would therefore be met. Otherwise, the holding company would incur 15 % corporate tax.

It is also important that the taxation regime also applies in the case of an under-year establishment of such a corporate structure consisting of holding and subsidiary. This results from § 8b (4) sentence 6 KStG.

We are surprised to find that the distribution of profits of a subsidiary to its holding company in the year of its establishment usually does not entail any exceptional tax consequences. Therefore, a closer look at the regulations in the trade tax law probably provides information about the puzzle solution.

3.2. Trade tax of the holding company in the year of its establishment

Here, too, we assume that the holding company will be founded in 2022. In the same year, the subsidiary will distribute its taxed profits to the holding company. A look at the Trade Tax Act informs us that no tax on the distribution of profits to the holding company is incurred if the holding company holds at least 15 % of the shares in the subsidiary that distributes at the beginning of the calendar year (§ 9 No. 2a GewStG). Thus, there is no exception in the collection of business tax if a profit distribution takes place in the same year to the holding company in which it was founded.

That is why it is important not to pay out profits to a holding company in the year of its establishment. Otherwise, the distribution of profits is subject to regular taxation under business tax. So it is best to wait with the profit distribution until the next calendar year, which follows the establishment of the holding company. In our example, this would be an option at the earliest in early 2023. And if you are flirting with the establishment of a double-storey holding company, then you should set up both holding companies in the same year.

In passing, it should be pointed out once again that a holding company is entitled to the optimal tax exemption for both corporate and business tax only if it holds at least 15 % of the shares in the subsidiary. Otherwise, at least the full trade tax is incurred by the holding company. However, in contrast to the flat-rate corporate tax rate (15 %), the municipalities entitled to collect business tax set the levy for business tax themselves. In the nationwide average, however, the trade tax is also about 15 % of the profits.

It remains to be asked why there are such significant discrepancies in corporate tax law and business tax law with a similar background and approach when considering already taxed profits. And to tell the truth, we also wonder, so we have no logical explanation for these deviations. But perhaps this secret is also founded in the procedure by which the German legislature enacts tax laws.