What is a holding company? Meaning and structure explained simply

Holding: meaning of the term

The word comes from the English "to hold". A holding company is a company whose main purpose is to hold and manage shares in other companies. It is then called the parent company or holding company, and the companies in which it holds shares are called subsidiaries.

Among SMEs and founders, a holding structure usually consists of two corporations: a GmbH or UG as the parent and a GmbH or UG as the subsidiary. This is then called a holding GmbH or holding UG. The law does not recognise "holding" as a legal form. The parent is subject to the rules of its legal form, so for a GmbH, the GmbH Act (GmbHG). The guide What is a GmbH? explains how the GmbH works.

How is a holding company structured?

How the structure works:

• You are a shareholder of the holding.
• The holding is a shareholder of the subsidiary. It holds the shares, manages profits and can acquire further shareholdings or assets.
• The subsidiary runs the actual business with customers, employees and contracts.

Who owns the holding? You or your fellow shareholders, according to your shares. Legally, the subsidiary does not belong to you but to the holding. You control it indirectly through your position as shareholder and usually also as managing director of both companies.

How many subsidiaries do you need? One is enough. Further subsidiaries can be added at any time, for example for a second line of business or a property.

Difference between a GmbH and a holding company

The GmbH is a legal form. The holding is a function that a GmbH can take on. A holding GmbH is therefore a perfectly normal GmbH whose purpose is to hold shareholdings. The same obligations apply to it as to any GmbH: articles of association before a notary, entry in the commercial register, balance sheet and publication. The real difference is therefore between a single GmbH that you hold directly and a GmbH that you hold through a holding.

Feature	Single GmbH, held directly	GmbH with a holding above it
Shareholder of the operating GmbH	you	the holding; you are a shareholder of the holding
Profit distribution by the operating GmbH	to you, 25% flat-rate withholding tax plus solidarity surcharge	to the holding, 5% taxable (Sec. 8b (1) and (5) KStG)
Sale of the operating GmbH	by you; with a shareholding of at least 1% (Sec. 17 (1) EStG), partial income method: 60% of the gain at your personal tax rate (Sec. 3 no. 40 EStG)	by the holding, 95% tax-free, 5% as non-deductible business expenses (Sec. 8b (2) and (3) KStG)
Liability	the GmbH is liable with its assets	each company is liable separately, saved-up profits lie in the holding
Effort	one set of books, one set of annual financial statements	two sets of books, two sets of annual financial statements
Formation at Recht 24/7	€319 net	€599 net for both companies

Holding company, group and investment company

• Group (Konzern): A group exists where a controlling enterprise and one or more dependent enterprises are combined under uniform management (Sec. 18 AktG). A holding company can be at the top of a group, but does not have to be. If it holds the majority in the subsidiary, the law presumes dependence and a group (Sec. 17 (2), Sec. 18 (1) sentence 3 AktG). A pure financial holding that does not interfere in the business can rebut this presumption.
• Investment company (Beteiligungsgesellschaft): Umbrella term for any company that holds shares in others. Every holding company is an investment company. In everyday language, "Beteiligungs-GmbH" means the same as "holding GmbH".
• Family foundation: Anyone who wants to tie up assets over generations often compares the holding with a foundation. The guide Family foundation explains the differences.

Types of holding company

Type	What the parent does	Typical use
Financial holding	only holds and manages shareholdings	building wealth, saving up profits from the subsidiary
Operating holding	is active in the market itself and also holds subsidiaries	established businesses that spin off individual areas
Management holding	steers the subsidiaries strategically without being operational itself	several business areas under one management
Family holding	pools a family's shareholdings	succession, joint management of family assets
Asset management holding	holds securities or real estate as well as shareholdings	investing saved-up profits
Intermediate holding	sits between the parent and the subsidiaries	larger groups, for example for a division or a country

Why does a holding company pay less tax?

The reason is Sec. 8b KStG. It is intended to prevent the same profit from being taxed several times with corporation tax as it flows from one corporation to the next. The subsidiary has already paid tax on its profit. If it distributes it to the holding, the dividend is disregarded at the holding (Sec. 8b (1) KStG). However, 5% of the dividend is treated as expenses that may not be deducted as business expenses (Sec. 8b (5) KStG). As a result, 5% is taxable.

Three conditions and limits you need to know:

• Minimum shareholding for dividends: The 95% exemption does not apply if, at the start of the calendar year, the holding directly held less than 10% of the subsidiary (Sec. 8b (4) KStG). For a holding with 100% of the subsidiary, this is not an issue.
• Trade tax: For the dividend to remain largely exempt from trade tax as well, the holding must hold at least 15% at the start of the assessment period (trade tax participation exemption, Sec. 9 no. 2a GewStG). The 5% non-deductible business expenses remain subject to trade tax even then (Sec. 9 no. 2a sentence 4 GewStG). Below that, the dividend is added back to trade income (Sec. 8 no. 5 GewStG).
• Sale of the subsidiary: If the holding sells its shares, 95% of the gain is also tax-free (Sec. 8b (2) and (3) KStG). The law does not require a minimum shareholding for capital gains.

Worked example: €100,000 distribution

Assumption: the subsidiary has already paid tax on its profit and distributes €100,000. The holding has held 100% since the start of the year. Corporation tax 15% (Sec. 23 (1) KStG, applies until 2027), solidarity surcharge 5.5% (Sec. 4 SolZG), trade tax base rate 3.5% (Sec. 11 (2) GewStG) and an assumed multiplier of 400%. No church tax and no saver's lump sum.

	to you privately	to the holding
Distribution	€100,000	€100,000
Taxable portion	€100,000	€5,000
Flat-rate withholding tax 25% or corporation tax 15%	€25,000	€750
Solidarity surcharge 5.5%	€1,375	€41.25
Trade tax (€5,000 x 3.5% x 400%)	not applicable	€700
Total tax	€26,375	€1,491.25
Remaining	€73,625	€98,508.75
Tax burden	around 26.4%	around 1.5%

The holding therefore keeps almost €25,000 more, which it can reinvest, for example in a new subsidiary, securities or a property. With a different multiplier, only the trade tax line changes. From 2028, corporation tax falls gradually to 10% from 2032 (Sec. 23 (1) KStG), which makes the burden at holding level somewhat lower still.

Below a 15% shareholding (but at least 10%), trade tax would be payable on the full dividend (add-back under Sec. 8 no. 5 GewStG). In the example, this would be €14,000 instead of €700, and the burden would be around 14.8%. Below 10%, the corporation tax exemption would also no longer apply (Sec. 8b (4) KStG).

The downside: The advantage is initially a deferral. If the holding immediately distributes the €98,508.75 on to you, around €25,982 in flat-rate withholding tax and solidarity surcharge is payable on it. You would be left with around €72,527, i.e. less than with the direct distribution, and the costs of the second company would come on top. A holding company therefore only pays off if the money works within the structure.

Liquidity: Even with distributions to the holding, the subsidiary as a rule initially withholds capital gains tax (Sec. 43 (1) sentence 3 EStG), which the holding recovers through its tax return (Sec. 36 (2) no. 2 EStG, Sec. 31 (1) KStG).

Advantages of a holding company

• Taxes on reinvestment: The subsidiary's profits arrive at the holding almost undiminished and can be reinvested there.
• Taxes on a sale: If the holding sells a subsidiary, 95% of the gain is tax-free (Sec. 8b (2) and (3) KStG). For a later exit, this is the biggest lever.
• Separation of liability: The operating risk lies in the subsidiary. Profits already distributed to the holding belong to the holding and are separate from the subsidiary's assets.
• Order with several businesses: Each line of business gets its own subsidiary. Problems in one area stay there.
• Succession and shareholdings: Shares in the holding can be transferred, inherited or granted to family members without dealing with each subsidiary individually. New partners can take a targeted stake in one subsidiary.
• Trade marks and assets: Assets such as trade marks or saved-up profits can sit in the holding instead of in the operating company.

Disadvantages of a holding company

• Double costs: two companies, two sets of books, two sets of annual financial statements, two tax returns, two chamber contributions and two publications.
• Tax advantage only without private withdrawals: If you need everything privately on an ongoing basis, you get no advantage, only extra costs.
• Formalities: Distributions require shareholder resolutions, and contracts between holding and subsidiary must be written, clear and at arm's length. Otherwise there is a risk of a hidden profit distribution (Sec. 8 (3) sentence 2 KStG).
• 5% remains taxable: Even the holding is not completely tax-free, and below the shareholding thresholds the advantage is partly lost.
• Setting it up later is more complex: Anyone who places an existing GmbH under a new holding must observe lock-up periods. If the holding sells contributed shares too early, tax can arise for you retroactively; the law specifies a period of seven years here (Sec. 22 (2) UmwStG).
• Money sits in the company: The holding is not a private savings account. Withdrawals are made via distributions or salary, and loans to shareholders must be at arm's length.

Who is a holding company worthwhile for?

Situation	Assessment
You want to withdraw all profits privately on an ongoing basis	usually not worthwhile, a single GmbH or UG is enough
Profits are to stay in the business permanently and be reinvested	typical case for a holding company
You do not rule out selling the business later	consider a holding, ideally set it up before growth
You run several lines of business with different risks	a holding with several subsidiaries can separate risks
You are only just starting and profits are still small	calculate costs and benefits honestly, often sensible later
You already have a GmbH with significant profits	a holding can be added later; clarify lock-up periods and procedure with your tax adviser

What does a holding company cost?

Formation of parent and subsidiary:

Item	Amount	Note
Recht 24/7 fee (Form a holding)	€599 net	fixed price for parent and subsidiary
each additional company from the third	€219 net	per company
Notary	approx. €350 to €750 per company incl. expenses and VAT	cheaper for a UG with the model protocol
Register court	approx. €300 per company	entry in the commercial register
Trade registration	depending on the municipality	for each company that carries on a trade
IHK contribution	depending on the chamber	for each company
Transparency register	€129 net per company	optional, report by Recht 24/7
Share capital	per company under €25,000 (UG) or €25,000 (GmbH)	not a fee, remains assets of the respective company

For two companies with individual articles of association, notary and register come to around €1,300 to €2,100 incl. expenses and VAT; on top of this come the fee of €599 net plus VAT and trade registration. With two UGs and the model protocol, it is cheaper. We clarify during formation whether the holding can make the contribution to the subsidiary from its own paid-in capital.

Ongoing per year: Everything a GmbH costs arises twice: bookkeeping, annual financial statements, tax returns, chamber contribution, publication and account fees. Ask your tax adviser for a quote for both companies beforehand and compare it with the tax advantage on the profits you want to keep in the holding.

How is a holding company set up?

New formation of parent and subsidiary

1. Holding first: The parent company is formed first, as a GmbH or UG.
2. Subsidiary formed by the holding: The holding then forms the operating subsidiary as its shareholder. This way, the parent holds the shares from day one.
3. Accounts and payment: Each company needs its own business account and pays in its share capital.
4. Registration: Both companies are entered in the commercial register, as a rule each 5 to 16 days after notarisation. This is followed by trade registration, the tax office and the transparency register for each company.

Name: Many parent companies have "Holding" in their name, for example "Muster Holding GmbH". The register court can check whether the name matches the actual activity, but only takes misleading content into account if it is evident (Sec. 18 (2) HGB).

UG or GmbH as the holding? Both are possible. The UG holding manages with little capital and is the cheaper way in, but must build up the reserve under Sec. 5a GmbHG. The GmbH holding needs €25,000 share capital, but appears more established to banks. More on the differences in the guide UG or GmbH and under What is a UG?.

Holding above an existing GmbH

If you already have a GmbH, you can contribute its shares to a new holding. The holding receives your GmbH shares, and you receive shares in the holding. The transfer of GmbH shares requires a notarial contract (Sec. 15 (3) GmbHG). For tax purposes, such a share exchange may, subject to conditions, be possible without disclosing hidden reserves (Sec. 21 (1) sentence 2 UmwStG), but a lock-up period of seven years then runs (Sec. 22 (2) UmwStG). This route always belongs in the hands of a tax adviser and a lawyer.

Alternative: fiscal unity: Instead of a holding with distributions, parent and subsidiary can also form a fiscal unity (Organschaft) with a profit transfer agreement, in which the results are combined for tax purposes. For this, the parent must hold the majority of the voting rights and the profit transfer agreement must be concluded for at least five years (Sec. 14, 17 KStG). This is a separate structure with its own obligations.

A variant with a limited partnership is the GmbH & Co. KG, which can also be set up under a holding. At Recht 24/7, there is the service Form a GmbH & Co. KG for this, for €519 net plus VAT and third-party costs.