More Wealth, Less Tax
Is a Corporate or Foundation Holding Structure Right for Your Business?
Once a business reaches a certain size, many entrepreneurs ask themselves: Should I set up a holding company?
Simply put, a holding company is not a specific legal form but an organisational model. A parent company – the holding company – owns shares in one or more subsidiaries, meaning the operating companies.
Important to know: A holding structure does not necessarily have to use a conventional corporate entity such as a German GmbH. A foundation, known as a Stiftung, can also serve as the apex of the holding structure and open up additional strategic possibilities.
We have summarised the key advantages and disadvantages, as well as the potential of a foundation holding structure, for you.
The Advantages of a Classic Holding Structure, for Example a GmbH Holding
The So-Called 1.5 Percent Effect on Participation Income
Under certain conditions, profit distributions from an operating GmbH to the holding company may receive favourable tax treatment.
Under Section 8b of the German Corporate Income Tax Act:
- 95 percent of qualifying participation income is generally exempt at corporate level.
- 5 percent is treated as non-deductible business expenses.
This frequently results in an effective corporate income tax burden of around 1.5 percent. However, additional requirements may apply depending on the size of the participation and the trade tax treatment.
Tax-Advantaged Sale of a Company
If the holding company sells an operating subsidiary, the capital gain may also benefit from favourable tax treatment under the applicable legal conditions.
The advantage: The capital can remain within the holding structure and be used for new investments or participations.
Enhanced Asset Protection
Profits can be transferred from the operationally riskier business to the holding company.
This can help to:
- separate assets organisationally from day-to-day operations,
- distinguish more clearly between operating and asset-holding activities,
- reduce the direct exposure of assets to operational risks.
Attractive for Real Estate Investments
The holding company can reinvest capital in real estate or separate property companies without first distributing the funds for private use.
Whether and to what extent tax advantages arise depends on the specific structure.
The Next Level: The Foundation as a Holding
If a foundation is placed at the top of the holding structure, additional strategic advantages may complement the tax aspects.
Protection Against Fragmentation
The company can be separated from the family’s private assets on a long-term basis.
Depending on the structure, factors such as:
- divorce,
- inheritance disputes,
- private creditors
may be less likely to result in the fragmentation of the business.
Advantages for Business Succession
A foundation can secure the continuity of the business across generations, regardless of whether individual heirs are able or willing to take over the management of the company.
Long-Term Inheritance Tax Planning
German family foundations are subject to substitute inheritance tax, known as Erbersatzsteuer, which generally arises at 30-year intervals.
Forward-looking planning can help make long-term tax burdens in connection with succession more predictable.
The Disadvantages and Challenges
A holding structure offers many opportunities, but it also involves additional effort.
Higher Ongoing Costs
Every company within the structure requires:
- its own bookkeeping,
- separate annual financial statements,
- ongoing tax and administrative support.
A foundation also involves additional administrative and supervisory requirements.
Greater Formation Effort
Depending on the initial situation, additional costs and requirements may include:
- notary fees,
- commercial register fees,
- capital requirements for further companies.
In the case of a foundation, the establishment process and sufficient asset endowment must also be taken into account.
Complexity of Private Cash Extraction
The assets belong to the respective company or foundation.
If capital is to be used for private purposes, corresponding tax consequences may arise.
A holding structure is therefore primarily designed for long-term wealth accumulation and protection – not for rapid private consumption.
Our Firm’s Conclusion
The holding structure is the Swiss Army knife of wealth accumulation.
Whether as a GmbH holding for tax-efficient reinvestment or as a foundation holding for long-term wealth and succession planning, the structure must be set up correctly from both a tax and legal perspective from day one.
Do you want to make your business and your wealth more resilient and future-proof?
Let us assess together which holding model fits your objectives. Send us a message to arrange a tax strategy consultation.