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Optimizing Taxation in Germany with Investment GmbH/Asset Management GmbH

Optimizing Taxation in Germany with Investment GmbH/Asset Management GmbH

In certain scenarios, an Investment GmbH (LLC) or an Asset Management GmbH can be the ideal legal structure for managing personal assets in Germany in a tax-efficient manner, ensuring their preservation for the longest possible duration of one’s lifetime.

It is intriguing to note that neither an Asset Management nor an Investment GmbH functions as a typical company. Their primary role is to hold and manage capital assets and rented real estate.

Tax benefits of Asset Management and Investment GmbHs

Generally, a GmbH engaged in business activities in Germany incurs the following taxes due to its legal form:

  • Corporate income tax at a rate of 15 percent
  • Solidarity surcharge of 5.5 percent
  • Trade tax (based on an assessment rate) of approximately 15 percent
  • Final withholding tax on profit distributions (from the GmbH) amounting to 25 percent

However, for an Asset Management or Investment GmbH, various tax reliefs may be applicable depending on the type of assets the GmbH manages.

One such relief is a corporate tax reduction if the GmbH holds a stake of at least 10 percent in another company. In such cases, profits from this participation are exempt from corporate tax, thereby reducing the tax burden by a corresponding amount.

Another relief is a trade tax reduction if the GmbH holds a stake of at least 15 percent in another company. In this situation, trade tax is no longer applicable, resulting in a tax advantage of approximately 15 percent (based on the assessment rate).

If an Asset Management GmbH solely holds real estate, the extended real estate reduction may apply under certain conditions, eliminating the trade tax on profit. The result is an effective current tax burden of 15.825 percent on the profit, subject to the following conditions:

  • Management of own capital assets,
  • Supervision of residential buildings and
  • Construction and sale of condominiums and detached and semi-detached houses.

If the GmbH pursues other activities in addition to those listed above, even if the scope is minimal, the extended reduction may be denied, leading to additional trade tax.

One disadvantage of this reduced taxation is that increases in the value of the managed property are taxable upon sale. However, this can be mitigated through appropriate structuring under certain conditions. WINHELLER will gladly consult on this matter.

In the context of succession, it is important to consider that heirs or new shareholders will be liable to pay inheritance or gift tax on the transfer of shares. Therefore, potential heirs must either have liquidity, or the GmbH must be capable of making distributions.

Benefits and requirements of an Asset Management or Investment GmbH

In comparison, if the shareholdings are held privately, the tax burden would be based on the personal tax rate, likely amounting to 42 or 45 percent. A GmbH, therefore, offers significant structuring potential.
However, the formation and administration of an Asset Management or Investment GmbH come with costs. Therefore, such structuring only makes sense if the tax savings outweigh the establishment and operational costs.

Broadly speaking, the costs of an Asset Management or Investment GmbH include:

  • Formation costs (e.g. notary, registration, articles of association),
  • Share capital amounting to 25,000 euros,
  • Annual costs (e.g. bookkeeping, managing director’s remuneration, administration).

Typically, a formation of such a GmbH only becomes profitable when it has cash assets or participations amounting to at least 100,000 euros, or when it possesses real estate that generates high rental income, surpassing the startup and operational costs.

Unique requirements for an Investment GmbH

This kind of structuring also has additional requirements that need to be thoroughly understood and carefully scrutinized through expert consultation.

For instance, a shareholder of a limited liability company might be subjected to exit taxation, even if they merely relocate their residence within Europe. Therefore, it’s prudent and recommended to seek professional advice in such scenarios.

Transferring various assets to the GmbH could potentially trigger taxation under certain circumstances. For example, contributing real estate to the GmbH usually incurs real estate transfer tax.

However, in cases of contribution, tax-exempt conversion transactions may be feasible, which would also require clarification through tax consultation.

It’s also important to note that banks impose higher financing requirements for a limited liability company, necessitating that any financed properties be chosen with a greater focus on profitability.

WINHELLER provides guidance on optimal design

As with all structures, it’s crucial to meticulously evaluate the most advantageous solution for you, considering your unique asset structure and personal circumstances, and to guide you towards a viable path. Our experienced attorneys and tax advisors specializing in asset management and succession planning are available to assist you. Please don’t hesitate to contact us with your inquiries and set up a non-binding consultation.

Continue reading:
Asset protection and growth of company and private assets

Marie Nolte

Marie Nolte specializes in advising nonprofit organizations, foundations and high net worth individuals. She advises the latter on inheritance and gift tax, succession planning and aspects of international tax law, among others.

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