Allowed tax saving model Holding! Here you will learn everything about the possibility of founding a holding company and why you should inform yourself about a holding company before founding.
Founding with, or setting up a holding structure, is highly recommended for founders, start-ups and entrepreneurs, as there is a wide range of possible uses and this is very advantageous in terms of tax law and liability law.
The advantages include:
- Save taxes
- Build assets
- Mitigate liability risks
- Create strategies for exit or a fresh start
- Send professional signals
- and and and
Depending on your business case, you will either set up a "cash cow" or an "exit scenario". A holding company can and will bring you an advantage in both variants, if certain things are taken into account.
What is a holding
A holding company is a so-called parent company that holds shares in one or more other companies. For reasons of liability and tax law, a corporation such as a GmbH (limited liability company) and a UG (limited liability company) has established itself as the most recommended legal form for a holding company, although a KG (limited partnership) can also be considered depending on the objective.
Thus, a holding company is a vehicle through which you hold your startup shares (to hold), rather than holding company shares personally.
HOW TO SAVE TAXES WITH A HOLDING
Of course, the tax savings are only useful if you generate taxable profits from your sales. Although this is less likely to be the case in the first few years of your start-up, you should nevertheless take this success into account when planning ahead and include a holding company.
This is because a holding company brings enormous tax advantages: you pay around 25.5% less tax on sales proceeds and profit distributions than if you hold the startup shares without a holding company.
Tax burden on the sale of GmbH shares:
In the following, sales of GmbH shares are examined from a tax perspective, which belong to the private assets of a GmbH shareholder, as personally and directly held. Depending on how high the participation quota was within the last years, the sales proceeds of a GmbH share are taxed as follows.
The more frequent case of a founder exit will probably be that of a GmbH shareholder selling shares in the start-up in which he has held at least 1% of the GmbH's share capital within the last 5 years. In the case of sales of company shares as private assets, the proceeds from the sale are therefore usually taxed using the partial income method, which is effectively a tax burden of around 27% (for an exit of more than €250,000).
However, if the shares in the start-up are held via a corporation as a holding company, sales proceeds and profit distributions are almost tax-free: they are effectively only taxed at a rate of 1.5%.
If the purchase price for your share in the start-up is, for example, EUR 1,000,00, the holding company will only pay around €15,000 in taxes on this and you will be left with €985,000 after taxes. Without a holding vehicle, you personally would have had to pay about EUR 266,300 in taxes, leaving only about EUR 733,700 after taxes. This leaves about a third, as €251,300 from the exit with a holding company. That is capital of over a quarter of a million euros, which you can then invest for further asset accumulation.
The same is usually true for profit distributions, so if you are following more of a cash cow model. However, the following should be noted here:
Your holding company must hold at least 15% of the company's shares. If your share is less than 15%, the exemption from trade tax does not apply. If the shareholding is less than 10%, the exemption from corporate income tax also ceases to apply. In this case, the holding company must pay the full rate of corporate income tax and trade tax of around 30% on profit distributions instead of 1.5%.
Therefore, these participation ratios should always be kept in mind; however, this only applies to dividends and not to proceeds from the sale of GmbH shares, or shares from your share portfolio, which is held in your holding company. This ultimately leaves more capital for investments in your holding.
EXTERNAL IMPACT OF THE HOLDING COMPANY
As a rule, little is said about assets and optimization, but in the entries in the commercial register one can see who holds directly and who holds via a holding. In practice, it appears that inexperienced founders usually do not hold a holding and thus present both inexperience and a lack of clarification and thus a lack of understanding of a VC case or even little ambition.
Of course, this does not apply across the board, but it can be said that holding via a holding company has not yet attracted the negative attention of any VC or business angel, but they do ask whether you are saving the costs of the holding company because you do not believe in your company.
WHAT DOES A HOLDING COST
With regard to the costs, a distinction must be made between the formation costs and the running costs. As a rule, a holding company is a corporation in the form of a GmbH or a UG.
The formation costs consist of the costs:
- the consulting / structuring and contract preparation in the amount of approx. 500,-€ - 1.000,-€
- the notarial certification in the amount of approx. 300,-€ - 850,-€
- the registration in the commercial register in the amount of approx. 150,-€
The running costs of the holding are:
- Annual financial statement
- IHK contribution
Together about 1.000,- € per year. If you have only a few transactions in the holding company and therefore only a few bookings, the effort for the tax consultancy is manageable and you can usually negotiate a deal with the consultant.
It can also be interesting to become operationally active with the holding company in order to generate the running costs - possibly even with sales tax deduction - and thereby build up a fortune for investments in the holding company.
This means roughly. 500 € to 1.000 € at foundation and 3.000,-€ for 3 years, so about 4.000,-€ in three years. So, if you make around 15.000,-€ profit with your company in 4 years, the costs of the holding will have been amortized.
WHY YOU NEED THE HOLDING COMPANY ALREADY AT THE STARTUP STAGE
If the operating company, i.e. your start-up, is not created from the holding company, in practice this leads to the following situation.
1. you get the full holding benefits only after 7 years;
2. the contribution of your start-up shares to a later holding company generally involves an outflow of liquidity.
As shown above, you will benefit from a holding company if your company is successful, i.e. if you receive profit distributions or sales proceeds. However, should these fail to materialize, you will only produce costs with the holding company.
A holding company initially incurs additional expenses in terms of formation, administration and costs, which is why many founders ask themselves whether it is possible to set up a holding company at a later stage, when it is foreseeable that the start-up will generate profits.
The answer to this is not yes and not no. Whereas moret no than yes!
From a corporate law perspective, it is possible to establish a holding company at any time and to contribute the shares in the company to the holding company. From a tax law perspective, however, this is not always possible in a tax-neutral manner. In addition, there is a lock-up period of 7 years. Sometimes there is a work-around, but this is associated with consulting costs. You will never again get your holding company as cheaply as you did when you founded it.
The personally held company shares are then transferable tax-free to a holding company if and to the extent that you hold the majority of the voting shares in the company. Majority in this case means 50% plus one vote.
If this is not the case (such as in the case of two start-up founders who each hold 50%), the following applies:
a) the shares are taxable when they are contributed to a holding company. This way is therefore actually excluded if the current value of the shares is already very high. If the value of the shares is still manageable, but it appears that it will grow, it could actually be a way to pay tax on them in order to hold them in the holding company in the long term.
b) there are also other ways, via somewhat more complex constructs and structures, to place the start-up shares tax-free in a later holding company, but this requires somewhat more detailed consideration, advice and structuring in the individual case, which usually involves costs and is only worthwhile if the shares are worth a great deal.
In both cases a) and b), however, the contributed shares are then subject to a 7-year lock-up period. This means that for 7 years, decreasing by 1/7, the taxation is mixed (holding and private). A sale of the start-up shares 3 years after the subsequent contribution to a holding company will therefore be taxed 3/7 to the holding company and 4/7 privately. However, depending on the proceeds of the sale, this can already be an enormous tax saving.
This also shows that it is advisable to establish a holding company as early as possible, preferably right along with the incorporation.