In some situations, a holding company can only use partnerships as operational subsidiaries. However, this prevents the creation of a body that is normally used to offset the profits and losses of the various subsidiaries. However, there are other ways to achieve this loss offsetting at the holding company level. Because losses can be offset in this case also with a trust KG.

1. offset profits and losses with escrow – Introduction

As a tax consultancy firm, we often advertise corporate structures in which a holding GmbH is involved in one or more operating subsidiaries. This is due to both tax and various other reasons, such as securing the profit carried forward by distribution to the holding company in order to minimize the liability of operative GmbH.

2. Netting losses with escrow: starting position

However, there are other constellations in which the classic holding structure is not a sensible solution. This is the case, for example, if you establish or acquire operative GmbH & Co. KGs as subsidiaries instead of operative GmbHs, but do not aim for conversion. As usual, the subsidiaries each have a complementary GmbH. The limited partner with a shareholding of usually 100 % is the holding company, which is also entitled to the entire profits of the subsidiaries.

Here the taxation of the profits of the subsidiary takes place in such a way that the Holding GmbH can in the end directly extract the profits of its subsidiary. This eliminates the re-taxation of dividends at the level of Holding GmbH, which is rather advantageous. However, this is accompanied by the loss of the possibility to offset profits of one subsidiary with losses of another subsidiary GmbH & Co. KG at the level of the holding company. In some constellations, however, this is precisely essential. So how can we make such a situation?

3. Setting off losses: Establishment of a holding company with Trust-KG

Our approach is relatively simple and requires few changes. For this purpose, we use the Complementary GmbH of GmbH & Co. KG and transform it into a limited partner. At the same time, it receives 1% of the shares in the limited partnership, while Holding-GmbH moves to the role of general partner and retains the remaining 99% of the shares. In doing so, we basically reversed the usual role distribution of the shareholders of a GmbH & Co. KG.

Since the GmbH, which now functions as a limited partner, still holds 1% of the shares, it is still regarded as an independent shareholder of GmbH & Co. KG. If it had not been transferred any shares, GmbH & Co. KG would lose one of the at least two necessary shareholders and thus inevitably become a pure GmbH. But we want to rule that out. It is therefore important that Kommandit-GmbH is involved in GmbH & Co. KG. Legally, the GmbH & Co. KG will therefore remain.

So what do you make of it? Neue Kommandit-GmbH with its participation of 1 % concludes a trust agreement with Holding-GmbH. It therefore manages the 1 % of the shares on behalf of Holding GmbH. This construct is therefore also referred to as Trust KG. As a result, Holding-GmbH is entitled to virtually the entire economic asset of 99 + 1 % in GmbH & Co. KG. It is therefore considered to be the sole beneficial owner of the partnership. And this is decisive for the taxation of profits and losses via the Trust KG, which now takes place at the level of the Holding GmbH.

4. How can a holding company offset losses with a trust KG?

Now let's dissolve what we have made possible with our just presented design. If the Holding GmbH has two or more subsidiaries and both have the legal form of a GmbH & Co. KG, then we convert both in such a way that they assume the structure of a trust KG. One GmbH & Co. KG generates profits, the other losses. The Trust KGs now tax the profits and losses of the two subsidiaries at the level of Holding GmbH. The Trust KG thus enables the holding company to offset the profits of one subsidiary against the losses of the others. What initially seemed impossible without Trust-KG has become possible with few changes in the company contracts and the establishment of trust agreements.

5. offset profits and losses with escrow – Conclusion

Corporate structuring via holding companies with several subsidiaries is often recommended in practice. Especially in times when you have to be able to react flexibly to changes in order to survive, this is an important safeguard. This allows the allocation of resources and tasks to be controlled as needed – both at home and abroad. Equally important, however, is the possibility that the profits and losses of subsidiaries can be offset at a central point. If you are dependent on subsidiaries taking the legal form of GmbH & Co. KGs, this succeeds only through our design. Only the Trust KG enables a holding GmbH to offset the profits and losses of its subsidiaries GmbH & Co. KGs. This thus makes a decisive contribution to the optimisation of taxes at the holding company level.