Tax optimisation in Germany with holding structures: How to lower your LLC's tax burden

Contents

• Intro: Holding structures for SMEs
• Splitting up operations
• An insider tip for selling a company
• Conclusion

Holding structures for SMEs in Germany

Holding companies

Until 2008, it took a considerable amount of equity to set up a holding structure with limited liability companies, especially for SMEs. The costs were unnecessarily high with a minimum of €50,000 in share capital for two GmbHs. But since the UG was introduced, holdings structures are no longer reserved for large corporations or established entrepreneurs.

A holding structure always consists of at least two companies: a parent company and a subsidiary. The parent company is designated as the holding company and often holds 100 per cent of its subsidiary.

When it comes to tech start-ups where multiple founders have joined together, the share of the subsidiary usually amount to 10-50%. This results from the founders/shareholders forming their own holding companies that hold shares in the operating company.

Holding types

A holding structure is not a legal company form, but a description of the organisation of multiple companies. The structures are often termed differently according to their application. The following four models are relatively common:

Operational holding structures

Large companies are typically organised in an operational holding structure. The holding company itself is the largest operating company in the entire structure. Subsidiaries are strongly influenced by the parent company and are usually regional or overseas branches.

Management holding structures

Management holding companies incorporate central management functions with the authority to make decisions that apply to all subsidiaries. Those management functions often include strategic direction, the filling of leadership positions and the controlling of capital flow within the group. The structure’s management holding company is usually headquartered in countries with attractive taxation systems, optimising the entire corporation’s tax payments.

Financial holding structures

The parent company in a financial holding structure exists solely to manage the structure’s assets, not to perform management functions. At most, the holding company might set financial targets for its subsidiaries. It often acts as the corporation’s bank as well, providing capital to its subsidiaries.

Organisational holding structures

An organisational holding structure mainly serves as a tool for internal organisation. By separating business units as independent subsidiaries, a company can maintain a comprehensive overview of its individual divisions.

The fifth type of structure has recently emerged in which the holding company acts only as a shareholder of the operating subsidiaries—a structure often used by SMEs. By employing such a structure, entrepreneurs benefit from the tax advantages of a holding structure without incurring unnecessary administrative expenses.

Tax advantages: Profit transfer and disposals

Holding structures offer entrepreneurs many possible tax scenarios. When a subsidiary is disposed of, for example, 95 per cent of the profits remains untaxed, according to current legislation. Only the last five per cent is assessed and taxed according to the usual regulations (approx. 30 per cent), meaning that only 1.5 per cent of the profits is paid as tax (§ 8 para. 1 KStG).

For these regulations to apply, the holding company must hold at least ten per cent of the subsidiary to avoid paying corporation tax and at least 15 per cent to avoid paying trade tax (§ 9 para. 2a GewStG). The profit now contained within the holding company can be reinvested in a new or existing subsidiary or paid out to its shareholders, who can take advantage of certain tax allowances. The fact that the total profit made from the disposal is taxed at only 1.5 per cent makes holding structures a must if you plan an exit in the coming years.

If a profit transfer agreement is in place, the taxation of the subsidiaries is applied to the parent company. With a profit transfer agreement, the losses of some subsidiaries can be offset by the profits made by other subsidiaries.

Increased asset protection

Holding companies are not liable for their subsidiaries. Profits can, therefore, remain within the holding company to be used as needed. If they remain unused, they will be at risk if a liability case arises. A business can effectively protect a portion of its assets with a holding structure.

Trusteeships

Some corporations prefer to keep their ownership structure less visible to the outside world. By using a trust agreement, an appointed representative—often a lawyer—appears externally as the shareholder while acting on behalf of the real owner.

This arrangement reduces the amount of ownership information a business must disclose publicly. Competitors or suppliers cannot easily identify who controls the company or the wider group structure. However, authorities such as the tax office and transparency register must always be informed of the trusteeship, and certain obligations—like competition-related restrictions—still apply.

Trust agreements can also help maintain separate external identities for different companies owned by the same entrepreneur. For example, one company might position itself as a low-cost provider, while another focuses on premium products — without the two brands influencing each other’s market perception.

Splitting up a company

Many companies are often active in multiple different business areas, with each area presenting its own risks and opportunities. If a liability case arises within one business division, all other divisions are affected, as the company is liable as a whole. However, entrepreneurs have the ability to separate their companies’ individual business divisions. If they do so in the form of corporations such as UGs, they protect not only their private assets from liability cases but the rest of their businesses as well.

Advantages

• Risk separation: Operational risks stay within each company rather than affecting the entire group.
• Asset protection: Valuable assets can be placed in separate entities to reduce exposure.
• Stronger market presence: Multiple companies or brands can target different customer segments without influencing each other.
• Employee incentives: Smaller entities allow you to appoint employees as managing directors—a title they would not receive in a large corporation.

Disadvantages

• Higher administrative workload: Each company has its own legal, accounting and reporting obligations.
• Increased running costs: Managing multiple entities often leads to higher ongoing expenses, including tax advisory fees. You cannot simply assume that costs scale linearly, e.g. three companies rarely mean “three times the cost”, as advisors bill based on total time and complexity.

Protecting plant and equipment

In addition to protecting the other divisions of a business, splitting up a company can also protect its physical assets if a liability case arises as well. The operating company can rent plant and equipment from a second company, which no longer puts the plant and equipment at risk in case of a liability claim as they no longer belong to the liable company. Only the tax office can take action against such an arrangement. The assets are protected against all other external parties (§ 74 AO).

Preconditions

Such a split can only take place when a company transfers fundamental components of operation to another, with both companies led by one person or multiple people together. There must be some sort of interdependency regarding objectives and personnel, otherwise, the separation cannot be legally considered a company split-up. The company that holds ownership of the plant and equipment is designated as the leasing company, and the other as the operating company.

Tax regulations

As soon as the company split-up is officially in place, the leasing company is considered a commercial enterprise. The money that goes to the leasing company for leasing equipment to the operating company is considered commercial income and is therefore subject to trade tax.

The leasing company also holds shares in the operating company, meaning that dividends are taxed according to the legal company form. However, the income of the holding company is usually offset by expenses for the purchase of the equipment. Entrepreneurs, therefore, have different organisational possibilities for financial optimisation.

Profit distributions from the leasing company are subject to either corporate tax or income tax, depending on the legal form.

When it comes to individual cases, is important to clarify whether or not the entity can be considered a consolidated tax group for VAT purposes 💬umsatzsteuerliche Organschaft. If this is the case, the operating company is considered as integrated into the leasing company. The leasing company must, therefore, submit advance VAT tax returns, annual turnover tax returns and possibly others. In a case such as this, the intended limitation of liability becomes irrelevant.

The Wiesbaden Model

The Wiesbaden Model refers to a type of split-up in which one entrepreneur assumes ownership of the leasing company, and their spouse assumes the ownership of the operational base. In such a case, the law assumes that there is no personal interdependency, allowing the spouse to earn income by leasing the operational base (BFH 30 July 1985, BStBl. 1986 II p. 359).

It should be noted that the spouse may not be able to take on insurable employment in the operating company. It is recommended to have the Deutsche Rentenversicherung determine the spouse’s employment status in this case.

An insider tip for selling a company

What would I be able to keep if I sold my company today?

Let’s say you sell your company for a profit of €300,000.

Here are the taxes you’ll pay:

The holding structure advantage

You can decide for yourself when the withdrawal should take place and in what amount. Alternatively, you can decide to invest in or purchase shares in other companies. Distributions from the parent company to its shareholders that take part later (and privately) are subject to capital gains tax.

Calculations carried out by tax adviser Stephan Brockhoff.