Establish a holding company and benefit from financial security

Are you thinking about setting up a holding company but aren't sure if it's worth it? As well as tax advantages, a holding company structure offers greater flexibility and protection for your assets. Find out everything you need to know to take the first step towards a financially independent future.

Facts

What is a holding structure?

A holding structure is often misunderstood and mistaken for a separate legal form, when in fact it is an organisational form. In a classic holding structure, there are at least two companies: the parent company and one or more subsidiaries. The specific functions and advantages of this structure are explained below.

The holding company can have different legal forms, such as a GmbH, UG (haftungsbeschränkt) or even a stock corporation. The parent company - also known as the holding company - owns shares in its subsidiaries. The same legal forms are usually used at both levels, but this is not mandatory.

To establish a holding structure, the parent company must own at least 10% of the shares in the subsidiary and also hold the majority of voting rights. This enables the parent company to exercise significant influence over the decisions of the subsidiary.

Key information

The holding company: Key information at a glance

Here is an overview of the most important information:

  • The holding company is not a legal entity in its own right. 
  • To set up a holding company, you need to incorporate a company, which can be a GmbH, UG (haftungsbeschränkt) or a stock corporation. 
  • The holding company is called the 'parent company' and holds shares in one or more other companies, the 'subsidiaries'.
  • The parent company must hold at least 10% of the shares in the subsidiary. 
  • The parent company must hold the majority of the voting rights in the subsidiary.
Advantages

Why a holding structure? - These are the benefits

When you set up a holding company, you bring several companies under one roof - and this structure offers some exciting advantages:

  • Tax optimisation: a holding structure can save you money. Profits that flow from the subsidiary to the parent company are 95% tax-free. Only the remaining 5% is taxed at around 30%. This leaves you with more of your profits to reinvest in growth and new projects.
  • Limited liability: If the subsidiary runs into difficulties, the parent company remains unaffected and is not liable for its liabilities. This protects your core business and assets.
  • Security of ownership: Valuable assets, such as machinery or technology, can be loaned to the subsidiary by the parent company. If the subsidiary becomes insolvent, these assets are backed by the parent company.
  • Strategic anonymity: Sometimes it is wise for the parent company and the subsidiary not to be immediately associated with each other. The holding structure allows you to choose whether the owners and company names are identical - giving you more flexibility in how you present yourself to the outside world.
disadvantages

The holding structure: What you need to know as a founder

There are many advantages to a holding company, but there are also challenges that you should be aware of. To help you make an informed decision, our team outlines the main advantages and disadvantages of this structure.

  • More administration: The holding structure involves additional administrative tasks. As it is another independent company, you will have more contractual and tax obligations, which often involve considerable organisational effort. It is therefore important that you allocate sufficient human and financial resources to meet these requirements.
  • Increased bookkeeping and double-entry accounts: Running a holding company means that you have to manage not just one but at least two companies. This includes separate accounting for each company and separate financial statements at the end of the year. This increases complexity and a clear separation of the two companies remains essential.
  • Dependence on the parent: The holding company structure closely links the subsidiary and the parent company. If the parent company comes under financial pressure or becomes insolvent, this can also jeopardise the stability of the subsidiary. As a founder, you should always be aware of this dependency.

As the challenges of a holding structure usually require expert legal and tax knowledge, it is advisable to have support at your side. Our experienced lawyers and tax advisors are at your side to help you navigate all the important steps for a smooth and successful holding structure.

Taxation

Holding structure and taxes: Your advantage for more effective profit

Being tax smart with a holding structure can make a big difference. Thanks to Section 8b of the German Corporation Tax Act (KStG), your company enjoys tax benefits on profits from shareholdings. A full 95 per cent of these profits remain tax-free - even if they come from the sale of company shares.

Only 5 per cent of the profit is taxed at the company's normal tax rate, which is around 30 per cent. This means that your holding company effectively pays only about 1.54% tax on the income of its subsidiaries - a significant advantage.

The holding company must hold at least 15 per cent of the shares in the subsidiary for you to benefit from the full tax advantages under Section 8b KStG.

This rule is also particularly attractive for equity investments. Profits from the sale of shares via the holding company also benefit from the reduced tax rate of 1.54%. In contrast, you would have to pay the full capital gains tax of 26.38% privately. This allows you to keep more of your gains over the long term and achieve your capital goals more quickly.

Two-tier holding company

A special case: the two-tier holding company and its particular structure

The two-tier holding company is a complex organisational form characterised by several hierarchical levels, with each company performing a specific function. This structure creates a clear separation between the operating business and the administration, allowing targeted use of tax advantages and flexible structuring of business activities. Typically, a two-tier holding company consists of the following elements

  1. The operating company
    The operating company is responsible for the actual core business. This is where products or services are developed, produced and sold, and where profits and losses are realised. In the holding structure, the operating company is the lowest level and usually operates as a limited liability company (GmbH or UG). Profits at this level are subject to trade tax and corporation tax.
  2. The holding company
    The next level is the holding company, which holds shares in the operating company. This company does not carry out any operational activities, but is responsible for the administration and coordination of the company shares. Often organised as a limited liability company, it is also a public limited company, which means that its tax obligations can be optimised through the two-tier structure.
  3. The Holding GmbH & Co. KG
    This combination of corporation and partnership combines tax advantages and flexibility, particularly in the management of shareholdings. The GmbH & Co. KG allows extended use of profit and loss offset and tax relief.
  4. The shareholders of the holding company
    At the top level are natural persons who, as shareholders, benefit from the profits of the entire holding structure. They coordinate the various business interests, manage tax issues and allow for a clear separation and management of the different levels of the structure.

The two-tier holding company has a number of strategic and tax advantages:

  • Protection of shareholders from tax consequences in the event of tax audits
    Since the operating company acts independently as a legal entity, it assumes tax responsibility itself. This means that the shareholders of the
    This means that the shareholders of the parent holding company are not directly affected in the event of subsequent taxation as a result of a tax audit. Due to the tax shielding of the holding GmbH, the shareholders remain unaffected by subsequent claims.
  • Reduced tax burden on dividends and capital gains
    Profits from the operating business can be distributed to the holding GmbH almost tax-free - only 5% of this income is taxable. This 5% is then subject to corporation tax and trade tax, resulting in an effective tax burden of around 1.5%. This can significantly reduce the tax burden on income.
    Possibility to offset profits and losses
    The two-tier structure enables the integration of the Holding GmbH & Co. KG, a favourable offsetting of profits and losses. Within the holding structure, profits and losses can be offset across different company levels, which is very advantageous from a tax perspective. This is achieved through the strategic networking of companies and appropriate profit transfer agreements, which increase tax efficiency.
  • Tax advantages of moving abroad
    The German tax authorities can levy exit taxation in such cases. However, a two-tier holding company offers a solution: by combining a corporation and a partnership at different levels, shareholders can avoid exit taxation and thus avoid tax disadvantages.
  • Trade tax savings for pure property companies
    If a property company is part of the two-tier holding company, this can also result in interesting tax advantages. If a limited liability company is set up to deal exclusively with the rental of property, it can apply for the extended trade tax reduction. This means that the rental income is considered tax-free for trade tax purposes and only corporation tax is payable - a significant tax advantage.

In summary, the two-tier holding company offers an intelligent and flexible structure for tax optimisation, asset protection and better management of business units. It is particularly suitable for entrepreneurs who wish to reduce their tax burden and strategically develop their corporate structure.

Property Holding Company

What is a property holding company?

A property holding company is a legal structure that focuses on the management and acquisition of property. This can include residential or office buildings, but also shopping centres or land. The main objectives of the property holding company are to sell, add value to and dispose of properties. The parent company owns at least 15% of the subsidiary and can secure long-term assets. 

Here are the three cases in which a property holding company can be useful:

  • Tax advantage when selling property: With the holding structure, you reduce the tax burden on the sale to just 1.54% by selling the subsidiary GmbH with the property to the buyer - thanks to the intercompany privilege, a large part of the profit remains tax-free.
  • Optimum use of the property: When your operating GmbH wants to move into its own property, you buy it through a new subsidiary. Your GmbH then rents the property and can deduct the rental costs in full for tax purposes.
  • Efficient profit shifting: The holding company allows you to reinvest profits from your operating GmbH in the real estate GmbH at favourable rates. This allows you to avoid high taxes on profit distributions.
checklist

Checklist: Is a holding company the right structure for your business?

This checklist will help you analyse the benefits and requirements of a holding structure and make an informed decision.

1. Understand the benefits and functions

Understand the tax advantages: Through the holding structure, 95% of the profits flowing from the subsidiary to the parent company remain tax free. The remaining 5% is taxed at a corporate tax rate of approximately 30%, resulting in an effective tax burden of approximately 1.54%.

Asset protection: The holding company provides protection against liability and insolvency by separating the parent company from the subsidiary. Valuable assets remain in the parent company and are protected.

Rent as an operating expense: The holding structure allows the parent company and subsidiary to have different names, which can provide strategic anonymity.

2. consider legal forms and shares

Choose the right legal structure: Consider whether you want to use a GmbH, UG or AG as your parent company. Each has its advantages and disadvantages.

Check the shareholding requirements: To create a holding structure, the parent company must hold at least 10% of the shares in the subsidiary and have the majority of voting rights.

3. assess the administrative requirements

Additional administrative work: Remember that you will need separate accounts and financial statements for the holding company.

Duplicate financial statements: The additional contracts and tax obligations will add to the administrative burden.

4. other tax considerations

Offsetting profits and losses: The holding GmbH & Co. KG can offer tax advantages by offsetting profits and losses across different levels.

Consider exit taxation: A two-tier holding company can help to avoid tax disadvantages in the event of a planned move abroad.

5. review property investments

Take advantage of tax benefits for property investments: A property holding company can reduce the tax burden on the sale of property and is a good way of securing long-term assets.

If the operating GmbH rents its own premises, the rental payments can be claimed in full for tax purposes.

6. estimate the financial outlay

Plan for the cost of tax and legal advice: A holding structure requires specialist knowledge, so professional advice is necessary.

Consider human resources: An increased administrative burden means that sufficient staff will be required to manage the holding structure.

Conclusion

Conclusion: The path to financial freedom through a holding structure

A holding structure offers many benefits, from tax relief to asset protection and strategic flexibility. If you are looking to optimise your business structure and achieve long-term financial goals, a holding company could be the right choice for you.

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FAQ

In our FAQ you will find answers to the most important questions about Set up a holding company: Take advantage of tax benefits, protect assets and grow smartly and your company founding.
A holding company offers several advantages: tax savings, asset protection through separate liability and a flexible external image. Profits can also be reinvested efficiently, for example in property or other subsidiaries.
Various legal forms can be considered for a holding structure, such as a GmbH, UG (haftungsbeschränkt) or Aktiengesellschaft. The parent company, which must hold at least 10% of the shares in the subsidiary, is free to decide which form best suits its strategy.
95% of the profits distributed by subsidiaries to the parent company remain tax-free. Only the remaining 5% is taxed at the corporate and trade tax rate of around 30%. This results in an effective tax burden of only around 1.54% on profits - a significant advantage over direct taxation.
A holding structure involves higher administrative and organisational costs, as there are at least two companies to manage and account for. More contractual arrangements are required and accounts must be kept separately for each company.
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