vermögensverwaltende GmbH offers interesting advantages in taxing profits from trading stocks, ETFs or other funds as well as real estate. Because vermögensverwaltende GmbH pays only 30% tax on the profits from trading in investment documents. This leaves 70% of the profit to reinvest in new investment products. This creates a steadily increasing potential for reinvestment. However, should the distribution to the GmbH shareholders be sought, this leads to a taxation within the framework of the capital gains tax. So a comparison is worthwhile with the taxation of capital income, which one as a private person is subject to from the profit through a comparable share trade. A distinction must be made between a price gain and the distribution of dividends. For a price gain from trading in securities, the actual acquisition costs and disposal costs incurred are taxable. In contrast, for dividends, only a savings lump sum of EUR 801 per person must be taken into account.

Shares & real estate purchases with vermögensverwaltender GmbH

1st field of activity of a vermögensverwaltenden GmbH

A vermögensverwaltende GmbH is a corporation in which, instead of an operational business, the achievement of profits from capital assets is in the foreground. It does not matter whether vermögensverwaltende GmbH appears as the parent company of a holding company or whether it merely uses the assets acquired by transfer. No matter in what form this corporation operates its asset management, it benefits from tax advantages that allow it to reinvest a high proportion of its profits.

In order to explore the tax advantages of an asset management GmbH, we draw a comparison with the taxation that a private person can expect. In doing so, we also examine the differences that an investment in listed stock securities, ETFs and other funds or in real estate causes.

Taxation of capital income: private person versus vermögensverwaltende GmbH

2.1. Taxation of capital income of a natural person

2.1.1 Taxation of dividends on a natural person

First on the basics: If a GmbH shareholder receives a profit distribution from his company, then this dividend is subject to flat-rate taxation by capital gains tax. A uniform rate of 25 % applies. Other taxes on this include the solidarity surcharge of 5,5 % and, if necessary, a church tax, the tax rate of which varies depending on the federal state. In addition, in the case of capital gains tax, it must be noted that an annual savings lump sum of EUR 801 per person can be counted against the sum of all capital income mentioned in the Income Tax Act (§ 20 EStG). However, this also covers all advertising costs associated with these capital incomes. Thus, the actual advertising costs incurred are irrelevant in the taxation of these incomes. The partial income procedure can only be used for dividends from corporations in which the shareholder holds more than 1 percent, which is usually not the case for shares.

2.1.2 Taxation of price gains on a natural person

Apart from dividends, profit participation rights and similar capital gains which a taxable natural person has to pay tax in the manner described above, other capital gains must also be taken into account in the capital gains tax. These are price gains from trading in securities that arise when the sale proceeds of a security exceed the purchase price. These taxable profits allow for a small amount of actual taxation costs. More specifically, these are costs incurred in the acquisition and sale of the investment documents. On the other hand, other costs, such as for a securities account, are excluded from tax consideration.

By the way, the price gain is only considered realized when the securities are actually sold. In contrast, an interim price increase above the level of the purchase price is without tax significance.

In addition, in the sale of similar securities previously acquired at different times, the order of acquisition is decisive in the calculation of the price gain. Because the securities purchased first, i.e. those that are the longest in the securities deposit, are also considered first in the sale. This is also known as the first-in-first-out principle.

2.2. Taxation of capital income of a vermögensververwaltungtendenden GmbH

Let’s now look at the rules that apply to the taxation of an asset management GmbH. Since this is a corporation, it follows the legal standards of the Corporate Tax Act from a tax point of view. In addition, the corporation constitutes a commercial enterprise. Thus, the collection of business tax must also be observed.

2.2.1. Corporate tax of a vermögensververwaltungtendenden GmbH: Taxation of dividends

In the case of corporate tax, the tax rate is uniformly 15%. However, if a corporation receives a distribution of profits from its participation in another company, this dividend can, under certain conditions, be formally considered tax-free. A distinction must be made between participation in another corporation or in an association of persons. This is because the condition for tax-free treatment of profits is that at the beginning of the relevant calendar year, vermögensverwaltende GmbH either holds a share of at least 10% in the capital stock or share capital of the profitable corporation, or that there is an interest in the assets of an association of persons to the same extent. However, there is an exception with regard to the date on which this condition is to be established. If a shareholding of at least 10 % is acquired only in the course of the calendar year, this condition is also deemed to be fulfilled.

In this context, however, the Corporate Income Tax Act also requires an accounting of the costs associated with the management of the participation. Again, instead of the actual costs incurred, a flat-rate approach of 5 % of profit is taxable. Thus, the corporate tax on such tax-free profits is actually 0,75 % (5 % to 15 % = 0,75 %).

Now, however, it is rather rare that a vermögensverwaltende GmbH achieves a shareholding of 10% in a larger, listed public limited company. Therefore, the profit that vermögensverwaltende GmbH makes on the basis of a dividend from a large public limited company is usually fully taxable.

2.2.2. Trade tax of a vermögensververwaltungtendenden GmbH

In business tax, in principle, the same rules are used as in corporate tax, but with one exception. Where the Corporate Income Tax Act requires a shareholding of 10 % in order to keep a profit distribution tax-free, this is only allowed with business tax from a shareholding of 15 %.

2.3 Consideration of losses

Now we consider the case where, instead of a profit, a loss occurs. On the positive side, both individuals and companies can offset a loss with profits incurred in other investment periods. A loss repayment is only possible by one year. However, the loss carry-forward is unlimited in time and in its scope. But in this case you have to distinguish exactly what kind of investment a loss is associated with. Because losses from trading in shares may then only be offset with such profits. Thus, for example, an offsetting of received share dividends with losses from trading in shares is also excluded.

Furthermore, there are differences in the treatment of losses in terms of tax type. Because in the case of trade tax, a loss return is excluded.

Another important point is the maximum amount to offset a loss with a profit. In principle, an offset of up to EUR 1,000,000 is possible. In addition, 40 % of the remaining profit is taxable. Should a remaining loss from the offsetting of loss and profit remain in a year, it is carried forward quite normally.

Thus, the risk of an investment in which profits can only be expected in the long term is to be represented from a tax point of view. This of course applies in particular to an asset management GmbH, which often deals with long-term investments.

As already described, interim share price gains do not lead to any tax consequences. Only when selling a share can it be determined whether there is a profit.

However, different rules apply to investment funds. In addition to the taxation of distributions and the price gain from the sale of investment funds, an advance lump sum on the accrued profits of investment funds has to be taxed since 2018 (§ 16 InvStG). In this context, the taxation of the advance fee is to be regarded as an advance payment. It is only at the time when the fund shareholding is sold that a regular taxation of the profit has to be carried out. Until 31.12.2017, the sale of so-called existing protected shares to investment funds was still possible tax-free, i.e. for shares acquired before 01.01.2009.

The amount of the advance fee depends on the difference between the distribution that an investment fund actually distributes to the taxpayer within one year and the so-called base income. In order to calculate the base income, the increase in the value of an investment fund within a calendar year is multiplied by 70% of the base interest rate, which the Deutsche Bundesbank continuously calculates. Therefore, due to the currently low interest rate, the amount of the advance fee has remained low since the introduction of the advance fee.

In the case of an under-year acquisition of shares in a fund, the tax on the advance fee is calculated on the basis of the actual period of time that the shares are in the assets of the investor.

Similar to the withholding of the capital gains tax, the taxes on the advance lump sum are automatically paid by the custodian credit institution as withholding tax to the tax administration. In the case of a sale of the investment shares, the credit institution then offsets the advance payments already made with the tax accruing on the actual price gain.

3.2.Income from pension funds is tax-free

Furthermore, income from investment funds is considered tax-free when it comes to investments for retirement provision. In addition, advance packages on funds are tax-free if, among other special cases, they are part of a company pension scheme.

3.3. Exemptions on investment income

In addition, under certain conditions, a so-called partial exemption of income from investment funds is possible. The amount of these allowances depends on the type of fund. Regardless of which of the partial exemptions referred to below, the tax office shall take them into account only at the request of the taxable person. Incidentally, only half of the applicable allowances apply to business tax.

3.3.1 Partial exemption for equity funds

This allowance for equity funds is generally 30% of the income (for example ETFs). If a natural person holds a share fund in his operating assets, the percentage increases to 60%. However, if a corporation instead owns a share fund, even 80% of the income is tax-free.

3.3.2 Partial exemption for real estate funds

For income from funds, 60% is tax-free if the funds invest at least 51% of their capital in real estate or real estate companies. If the capital of such a real estate fund is tied to this percentage in real estate or real estate companies abroad, even 80% of the income on this is tax-free.

3.3.3 Partial exemption of mixed funds

If, on the other hand, there is a mixed fund, then half of the partial exemption applicable to equity funds must be recognised.

Another special case is vermögensverwaltende GmbH, which invests exclusively in real estate. We are talking about the so-called Immobilien-GmbH. Thus, the field of activity of Pure Real Estate GmbH is limited to the rental or lease of real estate. This offers some tax advantages, provided certain conditions are met.

The first advantage is that pure Immobilien-GmbH can apply for the so-called extended land shortening at the financial administration. This ensures that the profits from renting and leasing real estate remain tax-free under trade tax. However, attention must be paid to details. Because the condition to make this application is that Immobilien-GmbH actually only operates the rental or lease of real estate. The rental of assets such as elevators, escalators or lifts, to give just a few examples, is an exclusion criterion when granting the extended land reduction.

Therefore, it is advisable to pursue a two-pronged strategy when renting real estate that also contains assets, such as large department stores or warehouses. In addition to Pure Immobilien-GmbH, a second company must then be founded whose assets comprise the assets of the property to be rented. Now the assets can be rented out to a tenant separately from the property. On the other hand, Immobilien-GmbH can also lease the property to the GmbH, which contains the assets. Thus, the second GmbH can offer the property together with the economic goods uniformly for rental. This solution even has the tax advantage that the rents paid by this second GmbH to Immobilien-GmbH are regarded as operating expenses. Consequently, they cut the profit, and help save taxes.

Tax advantages for natural persons and the vermögensververwaltungtendenden GmbH

Finally, three practical tips to help you save taxes when investing your capital.

5.1 Tax advantage of a natural person when investing in value shares

Those who invest in shares in order to benefit from regular profit distributions from these investments in the short to medium term are best served for tax purposes if they do so on a private level. The advantage over an asset management GmbH is that the otherwise continuously required corporate tax is eliminated. In addition, the dividend that a vermögensverwaltende GmbH receives from a listed public limited company will usually be taxable in full. Because in order to keep such profit distributions tax-free, as already described, a minimum participation of 10% in the public limited company is necessary. So the profits that have already been taxed at Aktiengesellschaft would be taxed at vermögensvermanagementden GmbH practically a second time.

Instead, a natural person, after deduction of the lump-sum savings allowance, incurs only 25% of the capital income, regardless of the taxpayer’s personal tax rate. However, the liability in this case, unlike with a vermögensvermanagementden GmbH, is unlimited. Thus, one should always consider the risk that such an investment strategy contains.

5.2 Tax advantage of an asset management GmbH for growth shares

If, however, instead of a relatively fast dividend, you prefer to bet on rising share prices in the long term, the vermögensverwaltende GmbH offers the best tax advantages. When investing in so-called growth stocks, i.e. investments in companies that reinvest a large part of their annual profit instead of distributing them, the focus is on the longer-term increase in the value of shares. This is linked to the fact that a profit is taxable only when the securities are sold. Since this is considered tax-free for vermögensverwaltenden GmbH under corporate tax, this is advantageous for the further reinvestment of the profit. For the taxation of comparable profits in a natural person, no such taxation is provided for in German tax law.

By the way, vermögensverwaltende GmbH offers the advantage that its liability is limited. In the case of speculation-based investment strategies, this is quite important.

5.3. The vermögensvermanagementde GmbH as lender helps save taxes

Since a distribution of profits by a vermögensverwaltenden GmbH leads to a taxation by the shareholder, so that a net return of approximately 50 % can basically be expected, alternatives are of great interest. So it is quite possible to save the full profit at vermögensverwaltenden GmbH by granting the shareholder a loan in the same amount. In this way, an indirect distribution of profits takes place. But this is only possible because interest rates are currently around 0%. This incurs no further costs for the shareholder, but he still receives (for the time being) tax-free financial resources in the amount of the gross profit of the GmbH. However, one point must be noted here, namely that the shareholder will actually refund the loan one day. Otherwise, this process can still lead to taxation. In the best case, they should be avoided.