For sole proprietors, it often makes sense to set up a holding structure to save taxes in the long term and to use the available cash flow from tax savings for further growth. This article explains the advantages, disadvantages and implementation of a holding structure based on a practical example.
Advantages and disadvantages of a holding structure
Before we dive into the practical example, it is important to understand what advantages and disadvantages a holding structure can offer.
- Tax optimization: A holding structure can help to save taxes:
- Distributions and disposals are 95% tax-exempt (corporate income tax and trade tax), i.e. Depending on the trade tax rate, this results in taxation of c. 1.6% on the distribution or a capital gain (lock-up periods must be observed). In comparison, the tax rate for an investment held as private assets is 26.375% or, if applicable, slightly lower if the partial income method is applied.
- In the case of a hidden profit distribution (vGA) (in German only), 95% of this is exempt from corporation and trade tax, which significantly reduces tax transfer pricing risks.
- Risk diversification: Separate subsidiaries allow risks to be spread across different parts of the company.
- Financial flexibility: The holding company can move capital efficiently between subsidiaries to meet financing needs.
- Complexity: Holding structures can be legally and organizationally complex, requiring thorough planning.
- Administrative expenses: A holding company requires additional administrative tasks to coordinate the relationships between the subsidiaries.
- Legal and tax advice: The establishment of a holding company often requires extensive legal and tax advice, which can result in additional costs.
Practical example: insight into the implementation of a holding structure
In our example, we consider the contribution of a sole proprietorship to an existing limited liability company. The contribution will be made as a contribution in kind as part of a capital increase. This process is subject to the regulations of the German Reorganization Tax Act (UmwStG) and offers various tax advantages for the contributor. Thereafter, the shares of the (operating) GmbH are transferred to an already existing holding GmbH.
- Tax-privileged contribution in kind: Pursuant to Sec. 20 UmwStG, businesses can be contributed on a tax-privileged basis if the requirements for this are met. In the present case, the business (all functionally essential business assets) is contributed to the GmbH, with the contributor receiving new shares in the GmbH.
- Retroactive tax transfer: The transfer is retroactive to January 1, 2023 (prerequisite: application for transfer to the Commercial Register is made before September 1, 2023), which means that all business transactions of the individual practice are attributable to the GmbH as of this date.
- Holding structure: The next step being considered is to contribute the shares in the GmbH to a holding company that has already been established. This exchange of shares could be tax-neutral, as the contributor holds 100% of the shares and no harmful disposals are made.
- Advantages of the exchange of shares: Through the qualified exchange of shares, the contributed shares could, upon application, be recognized at acquisition cost (book values), which offers tax advantages for the contributor, as there is no disclosure of so-called “hidden” reserves.
- Evidence requirements and legal safeguards: In the case of such structural changes, it is crucial to provide all required evidence in a timely manner and to make legal safeguards in order to minimize potential tax risks.
This example shows how complex legal and tax aspects have to be considered when implementing a holding structure. It is advisable to seek assistance from experienced professionals to take full advantage of this structure while ensuring legal compliance.
When is it worthwhile to establish a GmbH? For tax reasons, a GmbH is economically worthwhile from a profit of approx. EUR 110,000, as the sum of corporate income tax (CIT) and trade tax from this size onwards is lower than the average tax rate that would have to be paid as part of income tax.
The switch to a holding structure can be of considerable benefit to companies, especially if it is carried out with professional advice and careful planning. However, it is important to understand and comply with all tax and legal requirements to maximize tax benefits and minimize risks.
The s&w team will be happy to support you with tax advice in the context of restructuring and will analyze with you at what point a holding structure is worthwhile from an overall perspective. Contact us or make a free of charge initial online appointment now.
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Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute recommendations for action.