To GmbH or not to GmbH? New tax rules for holding companies in Germany: explained

Macauley Culkin - euros
Macauley Culkin - euros

If you’re planning an exit this year, you might want to read this… For founders in Germany, GmbH or UG (“mini-GmbH”) are the traditional favourite company forms. But, if you’re running a company to hold shares in another company, both may be about to lose their appeal. Osborne Clarke partner Joachim Breithaupt explains:


The traditional favourites – with a tax bonus

Many founders in Germany choose the legal form of a corporation – a GmbH or the so-called UG (Unternehmergesellschaft aka haftungsbeschränkt, or “mini-GmbH”) – for their operating company, because these forms limit their liability.

A corporation is also the first choice if the business model is oriented toward financing by third parties. Business angels and venture capital firms typically invest only in corporations, due to the tax advantages at the time of exit, if the investor itself is structured as a corporation. In this case, the investor generally collects capital gains and any dividend payments tax free. The taxes paid are low, only about 1.5 per cent of the profit.

Founders with holding companies have enjoyed the same tax advantages as VCs…

Founders in Germany who do not hold shares directly but through separate holding companies enjoy the same tax advantages (conferred by the “national corporation tax privilege” provided in sec. 8b of the German Corporation Tax Act (Körperschaftsteuergesetz, KStG)). The holding company must also take the form of a corporation, usually an UG for reasons of cost (as the GmbH form requires €25,000 of initial share capital).

At the time of exit, the founders are also able to collect the capital gains, to which they are entitled tax free in “their” UG. Nearly all of the profit (except the 1.5 per cent tax liability) can then be re-invested. Alternatively, the respective founders can distribute all or part of the profit to themselves. In the latter case, the dividend is subject to 25 per cent fixed income tax plus the German solidarity surcharge and church taxes.

holding company model - Germany

…but that could be about to change

Lawmakers are now seeking to limit these tax advantages. The intention is to grant the national corporation tax privilege only if the holding UG or GmbH holds an interest of at least 10 per cent of the operating corporation.

Read on for how the tax changes could affect you

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