The pros and cons of the Holding: Weighing up holding structures in Germany

Want to set up a Holding in Germany for maximum tax savings? Before you get too excited about potentially 95% tax-free profits, you should weigh it against a holding structure’s obligations. Such a decision calls for a pros and cons list to help you weigh up whether a holding structure is right for your business.

 

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Contents:

 

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Andreas Munck

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Got questions about setting up a business in Germany?

  • Startup expert
  • 10+ years experience

Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.

 

What is a Holding?

The term Holding originally comes from English and means ‘to hold’. Specifically, this describes the purpose of this type of corporate structure. The parent company (i.e., the Holding or holding company) ‘holds’ the subordinate subsidiaries.

Because it consists of multiple companies with at least two hierarchical levels, establishing a Holding usually involves forming (incorporating) one or more corporations (e.g., GmbH, UG).

How exactly a holding structure runs depends on its purpose. Below we look at how this kind of business can be structured.

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The different types of holding companies in Germany

  • Operational holding company: The parent company (Muttergesellschaft) is the main operational business, while the subsidiaries (Tochtergesellschaft) are the branches (Niederlassung).
  • Financial holding company: This holding structure is used for asset management and as an “internal bank”, but the parent company doesn’t do anything beyond that.
  • Investment holding company: This type of Holding is the structure of choice for entrepreneurs who have ambitions of a big exit. Here, the holding company takes on the role of shareholder (a proxy legal entity), and the subsidiaries are the operational businesses that the founders plan on selling.
  • Management holding company: The holding company takes over only administrative and controlling tasks (financing, personnel, etc.) instead of the operative business.

As this article’s focus is the pros and cons of holding structure in Germany, if you’re unfamiliar with the Holding, take a look at our article to learn more. 

 

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Andreas Munck

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Setting up a holding company in Germany can be tricky – let me help you 

  • Startup expert
  • 10+ years experience

Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.

 

Advantages of a Holding

Saving taxes

In a holding structure, if you transfer profits from a subsidiary to the parent company, they’re 95% exempt from tax. This tax exemption also applies to the proceeds from the sale of company shares. We go into the tax implications in greater detail below.

Protection in the event of liability

As a rule, the parent company (holding company) isn’t liable for the subsidiaries. A feature that also covers profits transferred from a subsidiary to the parent company. Because if the subsidiary goes into insolvency, the assets are protected.

Systematic accumulation of assets

With the transfer of profits and the high tax exemptions, you can create an accumulation of assets system. Whereby you use the parent company’s protected capital to invest in real estate or other companies.

 

Disadvantages of a Holding

Multiple sets of company books

By setting up a holding company, you officially establish an Organschaft (fiscal unity) or Konzern-Struktur (group structure). This makes financial management far more complex and high maintenance. As a consequence, not only does the effort increase but also bookkeeping and tax consulting costs.

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For example, you have to pay a tax adviser each year to prepare your Jahresabschluss (annual accounts). This has to happen if it’s an operational business or not. Make sure you know approximately how much your tax adviser is going to charge you and factor it into your decision-making.

High formation costs

The formation of several incorporated companies gets expensive. If you want to set up a holding company directly with two limited liability companies, the starting costs pile up.

Liquidity bottlenecks

During the formation of the holding company, make sure your tax adviser writes a declaration for the tax office that explains the purpose and organisation of the tax group. This speeds up the procedure to receive your VAT ID so you can start doing business as quickly as possible. Otherwise, you will have to reckon with liquidity delays while waiting for all your official registrations.

Liquidation costs

Especially with startups, there is no guarantee that the business will be a success. In the worst-case scenario, if a holding structure fails, several companies will have to be liquidated at great expense.

 

Taxation of a Holding’s investment income

Investment income realised by a holding company from the sale of a subsidiary, for the most part, avoids Körperschaftsteuer (corporation tax) and Gewerbesteuer (trade tax). Below is an outline of how tax liability is calculated.

Körperschaftsteuer (corporation tax)

The investment income is deducted from the taxable profit, but 5% must be an “außerbilanziell” (“off-balance”) entry.

Gewerbesteuer (trade tax)

Only 5% of the profit is liable for Gewerbesteuer (trade tax). 95% is trade-tax-free!

The prerequisite is that the holding company holds at least 15% of the shares in the company. If the shareholding percentage is lower, the entire amount of the profit is liable for trade tax. In terms of Körperschaftsteuer (corporation tax), however, 95% remains tax-exempt.

The tax relief conditions of a Holding can be changed at any time by the German government. Make sure you consult your tax adviser to get the most up-to-date information.

 

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Andreas Munck

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Want to talk to a human about setting up a business in Germany?

  • Startup expert
  • 10+ years experience

Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.

 

Conclusion

Setting up a Holding involves dividing a business into a parent company and one or more subsidiaries. It is, thus, not a separate legal form but a way to organise/structure a business.

Setting up a Holding makes sense for various reasons. For one, it serves as an extraordinary tax optimisation strategy. Another important reason is its utility as a tool to mitigate business risk.

However, the concept should be well thought out and set up correctly from the beginning. The costs of starting and maintaining a holding structure shouldn’t be underestimated. Indeed, if the burden becomes too heavy, a subsequent change in the company’s structure is diabolically hard.

In sum, make sure you crunch the numbers and do a thorough cost-benefit analysis before you start any formation process!

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Want to know more about the Holding?

Our Holding essential reading:

  1. What is a Holding?
  2. The pros and cons of the Holding<<<
  3. How to set up a Holding
  4. Subsidiary and spin-off companies

Master list:

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