The founder holding company from a tax perspective

You want to found a start-up and have heard that you can really save on taxes with a founder holding company? Now you are probably wondering whether this is just a rumor or whether you can really save taxes with a founder holding company. And if so, why? We want to explore these questions to help you decide whether setting up a holding company is really attractive for you.

In order to understand what the advantages and disadvantages of a founder holding company are from a tax perspective, let’s first look at what taxes your GmbH and you as the founder have to pay.

Kickoff: Which taxes apply where

First of all, it is important that we differentiate between you as a private individual and your GmbH. You are different tax subjects and your respective incomes are considered and assessed separately. In addition, different taxes apply to the GmbH as a legal entity (corporation) than to you as a natural person

1. Limited liability company level

If your GmbH has taxable income, this income is taxed at the level of the GmbH. This involves corporation tax and trade tax.

• Corporate income tax

Corporate income tax has a fixed tax rate of 15%. This is subject to a further 5.5% solidarity surcharge (the solidarity surcharge has not changed for corporations). Because there is no tax-free allowance, corporation tax is payable from the first euro.

• Trade tax

The trade tax is made up of the tax base and the assessment rate. The tax rate is 3.5%. The assessment rate is determined by the municipality in which your GmbH has its administrative headquarters. It is usually between 380% and 490%. The GmbH’s trade income is multiplied by the tax base rate of 3.5% and the assessment rate (in our example, this is 490%):

Trade income x 3.5% x assessment rate of e.g. 490%.

In our example, this results in a trade tax burden of 17.15%. In the case of corporations, such as the GmbH, there is also no allowance for trade tax. Like corporation tax, it is payable from the first euro.

2. Private level

As a founder, you only have taxable income when your GmbH distributes profits. Your GmbH has already paid corporation tax and trade tax on its profits. The profit remaining at the GmbH after tax deduction can now be distributed to the shareholders. This profit distribution is in turn taxed for the shareholder, i.e. you as the founder. This is generally done with the flat-rate withholding tax of 25%. In addition, there is also the solidarity surcharge of 5.5% and, if applicable, the solidarity surcharge. Church tax.

3. Managing director’s salary

The managing director’s salary must be strictly separated from the profit distributions. As a founding shareholder, you can also be the managing director of your GmbH. Ideally, you will have concluded an employment contract with the GmbH that regulates your remuneration. The remuneration you receive as a managing director will probably be taxed as wages. For the GmbH, the remuneration represents an operating expense; it reduces the GmbH’s taxable income. When determining the amount, you must make sure that the remuneration is in line with arm’s length principles. This means that the GmbH would pay the same amount to an external managing director. Anything that is not at arm’s length is considered a hidden profit distribution.

Teaser: What can the holding company do?

The founding holding company is usually a UG (haftungsbeschränkt). It can be set up quickly and with little capital. As the founder, you are the sole shareholder and managing director of your holding company. The holding company now founds the subsidiary GmbH (together with the other founders). The holding company is a shareholder of the subsidiary GmbH and you are a shareholder of the holding company. This means that we have at least three taxable entities in a holding structure: the subsidiary GmbH, the holding company and you as an individual.

1. Limited liability company level

Nothing changes at the level of the GmbH as a result of the holding structure. The GmbH must pay corporation tax and trade tax on its taxable income. However, if the GmbH distributes profits, these initially flow to the holding company because the holding company is a shareholder of the GmbH.

2. Holding level

Things are getting exciting at holding company level. First of all, we note that the holding company in our example is a UG (haftungsbeschränkt), i.e. a corporation. Like the GmbH, it must pay corporation tax and trade tax. However, precisely because the holding company is a corporation, it benefits from a holding advantage. This means that 95% of the profit distributed by the subsidiary GmbH to the holding company is tax-free. Corporation and trade tax only has to be paid on the remaining 5% of the distributed profit. This results in a tax burden of approx. 1.5% for the holding company. The prerequisite for this is that the holding company holds at least 10% of the subsidiary GmbH. And the holding company must be a corporation; partnerships do not benefit from the holding advantage. In our example, both apply.

You can reinvest the profits that are now at holding company level via your holding company. For example, in another company that you would like to set up or in which you would like to invest.

The holding company is therefore attractive for anyone who wants to reinvest profits promptly. To this end, the holding company creates a genuine reinvestment effect.

Entrée: What the holding company cannot do

If, on the other hand, you actually only want to distribute the profits from your GmbH to yourself as a private individual, then the holding structure suddenly becomes rather unattractive. This is because if the holding company now distributes the profit to you as a private individual, you will be subject to withholding tax at a rate of 25% plus solidarity surcharge and, if applicable, a flat-rate withholding tax plus church tax.

And we have just discovered the crux of the holding structure. If the profits from the GmbH end up in your private account, then the holding structure only causes additional costs. Firstly, an additional 1.5% tax burden is incurred at holding company level. And secondly, the holding company entails additional administrative costs (e.g. the Chamber of Industry and Commerce fee).

The holding company therefore does not ensure that more money ends up in your private account. If you do not intend to reinvest the profits from the subsidiary GmbH in a timely manner, the holding structure will be rather unfavorable for you.

Dessert: How the holding company scores the right points

We have seen that there is a reinvestment effect with the holding structure because there is only a tax burden of 1.5% at holding company level. You can really make the most of the reinvestment effect if you pursue an exit strategy. You have successfully built up your company, have a top valuation, are already in the starting blocks for your next project and are now deciding on a share deal.

Now it is not you as a private individual who sells the shares in the subsidiary GmbH, but your holding company sells its shares in the subsidiary GmbH. And just as with a profit distribution to the holding company, 95% of the purchase price from the share deal remains tax-free for your holding company. The purchase price from the share deal is therefore only subject to a tax burden of around 1.5%. And you already have the start-up capital for your next project in your holding company.

Digestif: Where the holding company gets deductions again

Caution is advised if the holding company grants a shareholder loan to its subsidiary GmbH. This is because if the subsidiary GmbH defaults and is unable to service the loan, the downside of the tax exemption comes to light: the default on the loan cannot be taken into account for tax purposes at the holding company.