Business profits are exposed to various risks. Among distribution to the shareholders, they are subject to taxation with 25%, which is the regular German income tax on capital income. Simple holding structures help German residents and international investors to receive tax cuts, to reinvest und to effectuate asset protection. Companies and shareholders in Germany can profit from significant advantages by setting up a holding structure.
Holding Company needs to be incorporated company
Those financial advantages presume that the shares of a German incorporated company (i.e. joint stock companies such as the German “AG”, limited liability corporations such as the German “GmbH” or Unternehmergesellschaft “UG”) are held to more than 15% by a German Holding Company. This Holding Company needs to be an incorporated company itself.
Alternate scenarios with foreign incorporated companies as the Holding Company are also possible but have to be examined on an individual basis.
Tax advantages through a holding structure
The main advantage of a holding structure is that the dividends distributed by the subsidiary are comparatively low taxed. The dividends distributed to the Holding Company by the subsidiary are subject to taxation at a rate of 1,5%. The background is, that the German state refrains from taxing transfers within groups of companies twice and therefore exempts revenue that one incorporation gains from dividends of another.
Collection of assets and reinvestment
The assets distributed to the Holding Company can be accumulated there and may serve as a capital reserve. They can be reinvested in a tax optimized way as well.
The assets are usually planned to be distributed to the shareholders of the Holding Company. This may cause taxation at a rate of 25% under certain circumstances, which is the regular German income tax on capital income. However, the assets will have grown due to tax optimized reinvestments until the date of distribution.
Holding structure as insolvency protection
The holding structures may serve as a protection in cases of insolvency of the subsidiary. Risk and liability may therefore be distributed to several or screened from single legal units, which enhances asset protection.
Setting up a holding structure
The easiest way to set up a holding structure is to establish the Holding Company first. The Holding Company as the parent company may then establish the subsidiary and will therefore hold 100% of the subsidiaries shares.
It is also possible to set up the holding structure once the operational company already exists. In order to perform this in a tax neutral way, the transaction must be performed in accordance with several clauses of the German Reorganization Tax Act (Umwandlungssteuergesetz).
Expert advice on the establishment of a protective holding structure
Do you want to benefit from the many financial advantages offered by a holding structure? Our experienced lawyers will be happy to help you set up a structure for your business. We look forward to your contact request.