The advantages of a two-level holding company

• A holding company is not a legal entity in its own right.
• To set up a holding company, you need a company such as a GmbH, UG (haftungsbeschränkt) or Aktiengesellschaft.
• The holding company acts as a 'parent company' and holds shares in one or more subsidiaries.
• At least 10% of the shares in the subsidiary must be owned by the parent company.
• The parent company must hold the majority of voting rights in the subsidiary.

The two-tier holding company is a special organisational form of holding structure. It is more complex than a simple holding. It consists of several levels and layers of companies. Each company has a specific function. 

Typically, a two-tier holding consists of the following elements 

• An operating company 
• A holding company 
• A holding GmbH & Co. KG 
• The shareholders of the holding company

The operating company is the company that runs the actual business. It is active in the operational area and takes care of the distribution of the product or service, production, development and external business relations with customers. It makes profits and records losses. 

Classically, these companies are limited companies (GmbH or UG). They are at the lowest level of the two-tier holding company. Profits are subject to trade tax and corporation tax.

The next level is the holding company. It does not actively participate in the operational business. This holding company holds shares in the company that is involved in the operational business and manages it. It therefore has no active role, but is responsible for managing the shares. This holding company is often a limited liability company.

There is another level between the shareholders and the holding company, which is the holding GmbH & Co. KG. The holding GmbH & Co. KG combines the advantages of a corporation and a partnership. It is important for tax structuring and the management of shareholdings in the holding structure.

The holding company shareholders are individuals who benefit from the profits of the two-tier holding structure. The top shareholders coordinate the investments in the individual companies, take care of tax matters and create a clear division between the companies involved. Overall, the two-tier holding company allows for complex structures that can have operational and tax advantages.

The two-tier holding company is an extended organisational structure that offers companies numerous strategic and tax advantages. By combining several levels of holding, you can optimise your tax burden, better protect your assets and make your business units more flexible. In this article you will find out how a two-tier holding company works and when it makes sense for your business.

Here are the 6 tax benefits at a glance: 

• No tax consequences for shareholders of a holding company due to tax audits
• Reduced tax burden on capital gains and dividends 
• Extensive opportunities to offset profits and losses
• Tax-efficient change of residence for holding company shareholders
• Tax advantages for operating companies based abroad
• Trade tax savings for pure property companies

If a tax audit reveals that a partnership has to pay additional tax on income, this also affects the partners directly, as they, as partners, pay tax on their shares via income tax. A corporation, on the other hand, which acts as an independent legal entity, pays tax on its income itself via corporation and trade tax. This means that shareholders of a GmbH are not affected by possible subsequent taxation as a result of a tax audit.

This advantage is also utilised by the two-tier holding company: the holding GmbH specifically shields the shareholders from any subsequent tax consequences by acting as an intermediary.

Dividends and capital gains generated by an operating GmbH can be received almost tax-free in a holding GmbH. Only 5% of this income is taxable. This 5% is then subject to approximately 15% corporation tax and trade tax. This results in an effective tax burden for the holding GmbH of only around 1.5%.

So far you have learned about the advantages of the GmbH as a holding company - but what about the limitations? As a legal entity, the holding GmbH is treated as a separate entity for tax purposes. This means that it cannot simply pass on profits and losses to its shareholders, as would be possible with a partnership. Is there a way around this? Yes - by integrating the holding GmbH into a superordinate holding GmbH & Co. KG as a controlled company. As a partnership, this Holding-GmbH & Co. KG can offset profits and losses itself or pass them on to its shareholders. The key lies in the strategic networking of all the companies involved through appropriate profit and loss transfer agreements.

Imagine you are a shareholder in a holding company and you are planning to move abroad. Such a move may have legal consequences as the German tax authorities may impose an exit tax. Why would they do that? They want to prevent you from selling your GmbH shares tax-free after you move. This means that you would have to pay tax on a fictitious sale of the shares before you move. A significant financial burden without having actually sold anything - sounds frustrating, doesn't it? It's understandable that you would want to avoid exit tax in this situation.

This is where the two-tier holding company comes in: By placing a partnership above the corporation that would normally trigger exit taxation, you can avoid this financial disadvantage. This is because shares in a partnership do not trigger exit taxation. This allows you to combine the advantages of the holding GmbH with those of the superordinate holding GmbH & Co. KG and benefit from a clever solution.

With a two-tier holding company, you can benefit from attractive tax advantages if you operate abroad. But how does it work? It is important that your operating company is managed there as a permanent establishment or a partnership; a corporation would not bring the desired benefits, as it would be subject to corporation tax in Germany.

Another crucial point is the contractual link between the holding GmbH and the holding GmbH & Co. KG as part of a tax group. This is the only way to ensure that profits are distributed tax-free to the shareholders. Why does this work? In many cases, Germany waives its right to tax on the basis of double taxation agreements with other countries. This means that the holding company is only liable for tax in the country of the operating company, where corporation tax is often lower than in Germany. A clever move to minimise your tax burden!

The two-tier holding company also offers some exciting advantages when it comes to letting property. Here are the key points to bear in mind:

• Pure property GmbH: At the operational level, you set up a GmbH that deals exclusively with letting property.
• Profit-reducing rent: The rent that this GmbH pays to other operating companies within the holding company has a positive effect on corporation tax and trade tax - you can expect tax savings of around 30%.
• Tax advantages: In the case of rental income, the real estate GmbH can claim the extended reduction in accordance with § 9 no. 1 sentence 2 GewStG (Trade Tax Act), which means that the income is regarded as tax-free for trade tax purposes. This means that the tax burden is only 15% corporation tax.
• Important condition: In order to benefit from these advantages, the holding GmbH must not profit directly from the rental. This requires another operating GmbH as a shareholder of the real estate GmbH.