If a holding company based abroad is involved in a German GmbH, the tax-free distribution of profits to the holding company is often an important topic. At the moment, however, this is only possible through a tax arrangement aimed at this objective. Although the European Court of Justice has already ruled on several occasions that the current legal situation in Germany has to be revised, implementation by the Federal Ministry of Finance in this regard is still pending. Therefore, we explain the principle with which you can still achieve the tax-free distribution of profits to a holding company abroad. As an example, we give the sale of the GmbH to a GmbH newly founded by the holding company. Based on this selected example, we show how the purchase price claim avoids the tax-binding criterion of profit distribution in Germany. This has the effect that instead an indirect tax-free profit distribution to the holding company abroad takes place.

25% Avoid capital gains tax: Tax-free profit distribution foreign holding /§ 50d para. 3 EStG

In the video we explain how to transfer profits of a German GmbH without capital gains tax to a holding company abroad.

1st profit distribution of a GmbH to a holding company: the basic case

Before we deal with the specific case of a (almost) tax-free distribution of profits by a German GmbH to a holding company based abroad, we want to familiarize ourselves with the normal case. So the first thing we look at is how a GmbH pays the profit to a holding company based in Germany.

1.1. Profit distribution of a GmbH to a German holding company

If a German GmbH plans a distribution of profits to the holding company, then the Income Tax Act provides for the withholding of the capital gains tax on this dividend. Firstly, this is 25% of the dividend. Secondly, it must be transferred directly to the financial administration. However, the holding company is now entitled to offset the capital gains tax paid in this way, so that it can only expect a tax of 1,5 % on the profit distribution in the end.

1.2 Taxation of the distribution of profits to a holding company abroad

And this is exactly the difference to a holding company based abroad. In this respect, it is treated differently from one that is based in Germany. In principle, holding companies abroad are also entitled to charge the capital gains tax retained by the GmbH and paid to the tax administration and thus to recover it. However, a large number of prerequisites must be adhered to. It is therefore remarkable that this only applies to holding companies based abroad, while these conditions have no relevance for a German holding company. In practice, these legal provisions of § 50d EStG exclude a tax-free distribution of profits to a holding company abroad in most cases.

1.3. German legal situation contradicts EU standards

It is therefore hardly surprising that this situation has already become the subject of international jurisprudence. In German tax law, this circumstance has even been called for twice by the European Court of Justice, albeit in two very similar proceedings. Nevertheless, in Germany the rule is still the case that a German GmbH has to withhold the 25 % capital gains tax on its profit distribution to a holding company abroad and pay it to the German tax administration without most holding companies abroad being able to recover this tax.

1.4. Tax design models as a way out for tax-free profit distribution

But what is impossible directly can often be achieved by a small detour. Thus, with at least eight different tax design models, the condition that leads to the withholding of the capital gains tax can be avoided. Because it is the profit distribution itself that is decisive as a criterion. Therefore, the aim here is to transform a direct and thus taxable profit distribution into an indirect, tax-free profit distribution to a holding company abroad. We will give you an example in the following chapter.

In our example, we need a GmbH based in Germany. We also want to give her a fictitious name, so she should be called WinEx-GmbH. We also need a corporation as a holding company based abroad.

Furthermore, we want to assume that WinEx GmbH generates an after-tax profit of an average of EUR 100,000 per year. In doing so, we assume that the holding company is very variable with regard to the timing of the profit distribution by WinEx GmbH. So you can also wait for a profit distribution over a few years, with the volume of the profit distribution of course continuously growing. But ultimately there will be a profit distribution at some point. As already described, in most cases this would lead to taxation in Germany without the holding company being able to count the tax. So now we are trying to avoid the facts that lead to taxation.

2.2. New foundation of a GmbH and sale of the previous ones to it

Instead of such a direct profit distribution, we now propose in our model that the holding company found another GmbH in Germany To better distinguish it from the original GmbH, we call it Neukauf-GmbH. This is to be done here after about five years. No direct distribution of profits by WinEX-GmbH to the holding company took place during this period. In the meantime, the dividend adds up to EUR 500,000. After the start-up, the holding company simply sells WinEx-GmbH via share deal to Neukauf-GmbH at a market price. With an annual profit of EUR 100,000, a selling price of ten times the usual annual profit seems quite appropriate.

By the way, this sale is tax-free in Germany, because the taxation law is abroad in this case. And since the probability is high in this context that such a foreign holding company often has its headquarters in a state with low or no tax, this is also often without significant tax consequences.

Thus, there is a purchase price claim of the holding against Neukauf-GmbH in the amount of twice the sum, which also corresponds to the original profit distribution of WinEx-GmbH. In order to settle a first half of the purchase price claim, Neukauf-GmbH uses the accrued profit of the WinEx-GmbH it has acquired. Only 1,5 % of the profit distribution of WinEX-GmbH to Neukauf-GmbH is taxable. The remaining half will then be financed over the next five years via the profit distributions to Neukauf-GmbH.

In this elegant way, we have transferred the profits accumulated by WinEx GmbH over the course of ten years to the holding company abroad, without this actually being declared to the German financial administration as a distribution of profits.

What happens when the next profit distribution is due?

This model is coherent in itself because it circumvents the decisive criterion for taxation in Germany, namely the distribution of profits per se. However, we have only avoided a one-time profit distribution. Therefore, the question of what should be done after the first ten years in the next taxable profit distribution in order to avoid taxation again is justified. Is it even possible to reapply this model in the same way? And the answer to that is yes. There are no legal restrictions on frequency. However, as already mentioned, there are also other alternatives that may better fit your future situation in the event of changing starting conditions. Of course, the expertise of an experienced tax consultant is always recommended.

But with a little luck, this may not matter in the future. But for this, the German tax laws must first be adapted to EU standards. So the next question is how long it will take for legislators to implement this. However, we do not have a reliable answer to this question either. However, the fact that the need to revise German tax laws has been called for since 2017 and has been confirmed again in 2018 without the Federal Government making a change so far suggests that it is better to rely on a solution through tax design.