The double-storey holding company is a construct consisting of several affiliated companies. With such a structure, up to 6 tax advantages can be realized.

On the one hand, a double-storey holding company avoids the risk that tax charges incurred during an audit directly affect the shareholders of the holding company. Secondly, such a holding company helps to limit the tax burden on dividends or capital gains to 1,5 %. Thirdly, the double-storey holding company allows profits and losses to be offset against each other up to the shareholder level. Fourthly, the participation in a double-storey holding company avoids the burden of a shareholder moving abroad with the otherwise due exit tax. The fifth point is based on the tax advantages if operating companies of the holding company are located abroad and are subject to lower corporate tax there than in Germany. In this case, the profits generated there by bilateral double taxation agreements are spared German taxation. And as a sixth point, we point out that pure real estate companies within the framework of the double-storey holding company remain unaffected by the trade tax.

In the video we show you the six advantages of creating a double-storey holding company.

1. What is a holding company and what is an organ?

Before we turn to the actual topic of our contribution, we would like to clarify certain terms and connections with regard to the double-storey holding company and its advantages. On the one hand, this is the concept of a holding company, on the other hand, that of an organisation. A double-storey holding company benefits in various ways from the creation of one or more organizational relationships within its organization.

1.1 Explanatory note to the holding company

A holding company is a corporate organization consisting of one or more operating companies and a parent company that holds a majority interest in the operating companies. While the operating companies, often even companies, are entrusted with the day-to-day business, the parent company has no other function than holding and managing the investments in the operating companies. Both a partnership (for example a GmbH & Co. KG) and a corporation (for example a GmbH) as a superordinate entity are possible. These two options will also be relevant in the future, as a partnership as a holding company offers different advantages than a corporation.

1.2 Explanatory note on the organisation

1.2.1. Definition of organs

An organization within the meaning of the Corporate Income Tax Act is an association of several contractually linked and thus interdependent companies (§ 15 KStG). In addition, there is also a further definition of the organization in the sense of the VAT Act, but this is irrelevant in our considerations.

In the case of an organization, the parent company is referred to as the organ carrier, while the affiliated companies are referred to as organ companies.

The contractual commitment is made by profit or loss contracts between the entities of the organization. As a result, a holding company is also able to establish an organization. And so the organization is also of great interest for the double-storey holding company we deal with.

It should also be noted that corporate tax treats an entity differently than if the companies tied to it were taxed individually. This leads to a more favourable taxation of bodies.

1.2.2. Prerequisites for creating an organ

In connection with the creation of an institution, we would like to highlight some relevant specificities. First of all, it must be ensured that an organisation is designed for a period of at least 5 years. If the organising relationship is terminated prematurely, then the Treasury will carry out a re-taxation, whereby the tax authorities assume that the organising body never really existed. It is therefore clear that the tax advantages previously enjoyed by the institution thus lead to an additional burden.

However, the premature termination of the organs is quite possible for important reasons. An important reason, for example, is the sale of an affiliated company. However, no intention to sell the company must have existed at the time of creation of the body.

2nd establishment of a double-storey holding company

The structure of a double-storey holding company is, unlike the name suggests, divided into four levels. Nevertheless, the following description of the construction of a double-storey holding company reveals the reason for this designation.

The structure chosen here to represent the structure of the double-storey holding company corresponds to the direction in which profits flow. Therefore, we start with the operating companies at the lowest level and then proceed with our explanations to the highest level of the holding shareholders. The advantage of this unconventional structure is that it also makes the advantages that the double-storey holding company offers the shareholders easier to understand. After all, this model is about the largest possible tax advantage of the holding shareholders.

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Picture of the construction of a double-storey holding company

2.1. The level of operating entities

The operating companies are therefore located at the lowest level of a double-storey holding company. They are entrusted with the actual business activity. In particular, production and distribution should be mentioned here. But other important tasks such as research and development or marketing are also responsible at this level by independent companies. In any case, this is also the level of a double-storey holding company, where profits and losses arise. Since the operating companies are often themselves corporations, this leads at this point to a first taxation with corporation tax and business tax. However, a partnership as an operating company is also possible – and, as we will show later, may even be advantageous.

2.2. The level of Holding GmbH

The next higher level within a double-storey holding company is the Holding GmbH. The function of Holding GmbH is merely to hold and manage the holdings in the operating companies. Thus, it is set up without its own business activity. The profits and losses of the operating companies naturally flow to Holding-GmbH. Therefore, these inflows are also taxable by Holding-GmbH by corporation tax and trade tax. However, the legal requirement applies here that these revenues are effectively taxable at only 5%. In other words, 95 % of the income of the Holding GmbH is tax-free. It should also be noted that the remaining 5% are taxed at a tax rate of approximately 15% each. For this reason, the total tax burden of Holding-GmbH is only about 1,5 %.

If at this point the double-storey holding company were to be interposed instead of a corporation, the taxation of revenues would be different. The consequence is higher taxation within the framework of a capital gains tax. Although each natural person holding a stake in this partnership is entitled to an annual allowance of EUR 801,00, the excess share is then taxable at a flat rate of 25 %.

2.3. The level of Holding-GmbH & Co. KG

Holding GmbH is owned by a Holding GmbH & Co. KG. This is the next higher level within the double-storey holding company. Holding-GmbH & Co. KG is also only responsible for holding and managing the shareholding in the GmbH. However, their actual function in this corporate structure is different. Without prejudging the details explained in the section on the advantages of the double-storey holding company, it should be noted that this structure compensates for the respective disadvantages of a partnership and a limited company as a holding company.

In any case, the superposition of a Holding GmbH and a Holding GmbH & Co. KG is the reason why this construct is called a double-storey holding company.

2.4. The Level of Holding Partners

The highest level in the hierarchy of the double-storey holding company are the shareholders, who are mostly natural persons. Profits passed on to the shareholders via Holding-GmbH & Co. KG are to be treated as income from business operations within the scope of income tax. Thus, these revenues have a different tax treatment than if they came from a limited company, such as a holding company. Income from business operations can, under certain conditions, remain tax-free to 40% within the framework of the partial income procedure.

In addition, the shareholder level is also of interest in view of the tax advantages presented below, since the double-storey holding company offers significant direct advantages at all levels, but especially for the holding shareholders. And we're going to introduce them to you in detail.

If company audits at a partnership result in income being taxed after tax, this is also relevant for the shareholders via the associated basic notice. Because in a partnership, it is the shareholders who tax the profits by income tax. On the other hand, a limited liability company, which is also regarded as a separate legal entity from a tax point of view, is taxed on its own income under corporate tax and business tax. In other words, GmbH shareholders are spared re-taxation on the basis of an audit.

And it is precisely this advantage that the double-storey holding company uses by protecting the circle of shareholders from these effects through the interposition of a holding GmbH.

Advantage 2: Highly reduced tax burden on dividends and capital gains

The taxation of dividends and capital gains arising in connection with an operative GmbH is almost tax-free at its parent holding GmbH. Only 5% of these are de facto taxable. And these 5% are taxed under corporation tax and business tax at a rate of about 15% each. The actual tax burden on the part of Holding-GmbH is therefore only about 1,5 %.

Advantage 3: Comprehensive possibility of offsetting profits and losses

So far we have learned about the advantages of the GmbH as a holding company. But the Holding-GmbH has its limitations for all its advantages. As a legal person, it must be regarded as a separate entity with its income from a tax point of view. With regard to the possibility of passing on profits and losses to its shareholders, as would be the case with a partnership, the Holding GmbH has legal limits. Nevertheless, it is possible to achieve exactly this, namely by subordinating the holding GmbH to a higher-ranking holding GmbH & Co. KG within the framework of an organ. In its capacity as a partnership, Holding-GmbH & Co. KG is perfectly capable of offsetting any profits and losses either itself or even passing them on to its shareholders. The key to this is the clever integration of all companies involved in the double-storey holding company by means of suitable profit transfer agreements.

Advantage 4: Avoidance of Exit Taxation of Holding Shareholders

Assuming the shareholder of a holding GmbH plans a private relocation abroad. Then this is for legal reasons for the German tax administration to carry out an exit taxation. This is because one wants to avoid that a potential sale of the GmbH by the shareholder after his move abroad in Germany without tax consequences. So the procedure in this case is simply described in such a way that before the move taxes are levied on the fictitious sale of the GmbH shares. Of course, this often means a considerable financial burden on the shareholder, without actually arising equivalent value. And just as natural is the desire to avoid the exit taxation in such a case.

This is exactly what we achieve with the double-storey holding company by superimposing a partnership on the capital company that otherwise triggers the exit taxation. Because a participation in a partnership is not a reason that triggers an exit taxation. For this reason, we combine the advantages of Holding-GmbH with this advantage that the higher-level Holding-GmbH & Co. KG offers us.

Advantage 5: Tax advantages for operating companies based abroad

With a double-storey holding company, tax advantages in connection with operating companies abroad can be realized. Moreover, a tax exemption for profits made abroad in Germany is also given in this way. However, some special adjustments have to be made within the double-storey holding company.

This model is initially only possible if the operating company abroad is a permanent establishment or a partnership. In the case of a corporation, however, this is excluded. Because in this case, a corporate tax in Germany is to be expected. Furthermore, it must be ensured that the Holding-GmbH and the Holding-GmbH & Co. KG are contractually linked in one organ. Otherwise, no tax-free forwarding of the profits to the holding shareholders is possible in Germany.

The reason for the tax exemption of profits in Germany is that Germany waives its taxation right in this case on the basis of bilateral double taxation agreements with numerous countries. Otherwise, there will be a second tax on company profits, which one would like to avoid. Thus, Holding GmbH is taxable only in the country in which the operating company operates.

The real advantage here is that the corporate tax that the Holding GmbH bears in this case is usually significantly lower abroad than in Germany.

Advantage 6: Avoidance of trade tax for pure real estate companies

The double-storey holding company is also advantageous in connection with the rental of real estate. For this purpose, a pure real estate GmbH is established at the operational level, which therefore pursues no other commercial objectives apart from the rental of real estate. It now leases real estate to other operating companies within the holding company. There, the rent to be paid is to be used to reduce profits for corporate tax and business tax. The amount of tax savings is in the order of about 30%.

At Immobilien-GmbH, the rental income is taxed. However, since this represents pure income from renting and leasing, the GmbH can apply for an extended reduction pursuant to § 9 No. 1 sentence 2 GewStG for taxation. Because of this, the rental income under the business tax is to be regarded as tax-free. The tax burden on the part of Immobilien-GmbH is thus only 15 % corporate tax. In this way, the tax burden of Immobilien-GmbH is reduced by about 50%.

In this regard, however, it should also be noted that this model is only possible if the Holding GmbH benefits only indirectly from these advantages. If a shareholder derives a benefit from the letting and leasing of the real estate and thus also from the extended reduction in business tax, the extended reduction is excluded. Therefore, in our model, another operative GmbH as shareholder in Immobilien-GmbH must be subordinated to Holding-GmbH. This intermediation avoids that Holding-GmbH receives a direct benefit from the rental by operative Immobilien-GmbH.

4. Final observations

4.1. What You Should Consider

Since the tax advantages of the double-storey holding company presented here can be in very different areas, there are also correspondingly many possibilities to combine them. However, care must then be taken to ensure that all legal requirements are actually complied with – both at national and international level. Furthermore, some of the constellations described here are quite complex. Therefore, they can hardly be presented in full detail in this context. The drafting of contracts or the ongoing support of the individual companies within the double-storey holding company can only be described as simple to a limited extent. Finally, it should also be noted that the advantages of a double-storey holding company only exist if the advantages obtained thereby exceed the costs associated with their creation and management.

4.2. How we can support you

In all these aspects, consulting a tax advisor experienced in this matter is therefore more than advisable. As specialists for both corporate taxation and international tax law, we are ideally positioned to show you individually with an analysis of whether a double-storey holding company is worthwhile for you. If this is indeed the result of our audit, then we are also happy to accompany you in the implementation of your plans regarding the creation of a double-storey holding company. You can then draw on the expertise of our own legal department, for example in connection with the drafting of contracts. In addition, we are happy to assist you in connection with your double-storey holding company in order to enable you to take full advantage of this particularly advantageous corporate structure.