Holding Company in Germany: Legal Advice

Holding Company in Germany: Legal Advice

The holding company in Germany offers many advantages – from tax exemptions and limited liability to systematic asset accumulation with favourable risk distribution. However, these advantages only apply if the holding company does not engage in economic activity itself. It is, therefore, necessary to state the purpose of the company correctly at the time of formation. Let our corporate lawyers advise you on this.

At Schlun & Elseven Rechtsanwälte, our lawyers advise entrepreneurs and companies worldwide in matters of German corporate law. If you would like our expert assistance, please do not hesitate to contact us directly.

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What is a Holding Company?

A holding company is not a typical legal form such as a civil law partnership (GbR) but rather an organisational form or structure for companies. What is meant here is a structure that consists of at least two companies: a superior company ( called the parent company) and at least one subordinate company ( called the subsidiary company). The parent company holds shares in the subordinate subsidiaries and assumes the function of the holding company.

A holding company is, therefore, a company (parent company) that holds shares in at least one subordinate and dependent company, which in turn conducts the actual business.

Forms of Holding Companies

In total, there are five different types/forms of holding companies::

Financial or Asset-holding Company

The financial or asset holding is purely administrative. There is no strategic or operational intervention in this form of holding. Instead, this variant of a holding company functions as an internal bank and serves to optimise the flow of financial resources in the holding company. Here, the subsidiaries are strategically independent and take over the operational business.

Management Holding Company

In this holding company, the parent company primarily assumes strategic monitoring and controlling functions of the subsidiaries. These processes occur insofar as the parent company, for example, supervises the management positions of the subsidiaries or the filling of these positions and often acts as the sole decision-making authority. Despite the parent company’s superior function, the subsidiaries can operate independently.

Operative Holding Company

Here the parent company takes over managerial activities and is usually superior to the subordinate companies in financial, personnel and spatial terms so that the latter is dependent on the parent company in this respect. In the case of the operational holding, the subsidiary primarily acts in a supporting role. At the same time, the parent company is active in the market and, among other things, defines external appearances for the subordinate companies. This type of holding represents the traditional form of large companies.

Organisational Holding Company

The organisational or structural holding serves to organise a company internally or to divide it into different divisions. This form of holding is often used when a new risky business area is planned. Such a holding company can then be spun off into a subordinate subsidiary group so that the other companies remain unaffected if this division fails.

Strategic Holding Company

This variant of a holding company is characterised by the fact that the parent company and any associated subsidiaries present themselves to the outside world as a strategically united group. It is similar to the management holding mentioned above.

Establishing a Holding Company: the Requirements

When establishing a holding company, a distinction must also be made between the different variants. It is possible to establish a holding company if

  • at least two already existing companies form a holding company,
  • an existing company and a newly established company merge, or
  • two new companies are founded, one of which forms the parent company and the other the subsidiary.

In the latter variant for forming a holding company, the parent company is usually formed first and only then the subsidiaries.

In principle, the foundation of a holding company requires the existence or foundation of at least two companies. The following legal forms can be considered for the companies:

  • Public limited company (AG),
  • Limited liability company (GmbH),
  • Entrepreneurial company (UG),
  • Mixed forms.

A notary appointment must take place to record the merger of the companies into a holding company and thus establish the holding company. Once all the companies have been founded, the holding company is registered as a shareholder of the subsidiaries. In this process, the subsidiaries’ shares- between 10 and 100 per cent – are transferred to the holding company.

The lawyers of the law firm Schlun & Elseven will be happy to answer all your legal questions. They will explain to you the various legal forms – which come into consideration when setting up a company – and check which is best suited to your project.

In addition, we will be happy to assist you with the necessary registration of the name of the holding company with the Trademark and Patent Office. Our article “Company Formation in Germany” contains further information.

Costs of Forming a Holding Company

The costs of setting up a holding company in Germany depend on the legal form chosen to establish a new company and, consequently, on the start-up capital required. If the companies already exist, the holding company’s formation is much less expensive.

The minimum start-up capital required for the formation of the above-mentioned legal forms is €50,000 for forming a public limited company and €25,000 for establishing a private limited company. A minimum capital of one euro is sufficient to start a UG, although founders should consider that annual costs of approximately €800 are incurred for this legal form.

Other costs that may be incurred when founding a holding company include:

  • Expenses for registering a business,
  • Costs for registration in the commercial register,
  • Contribution to the Chamber of Industry and Commerce,
  • Notary fees.

Preparation and Planning before Holding Company Formation

Careful preparation and planning on your part should take place before the foundation of a holding company. This is particularly necessary if the establishment of the holding company also implies the establishment of one or more companies.

The following steps are necessary to set up a holding company:

  • Draw up a business plan: You should first draw up a business plan and check which form of holding company is most suitable for you and your project. When drawing up the business plan, also take into account possible risks and make a decision regarding the question of which corporate forms the parent and subsidiary companies should have.
  • Financing: Another aspect you should include in your considerations regarding establishing a holding company is the financial situation. It is essential that you check whether the funding of your project is secured.
  • Marketing: You should also have prepared a marketing concept for the various companies in advance.

Advantages and Disadvantages of a Holding Company

The establishment of a holding company in Germany entails the following advantages and disadvantages:

Advantages of a Holding Company

  • Tax savings: The parent company and the subsidiaries are liable to tax according to their legal forms. However, only 5% is taxed when the profits earned by the subordinate companies are sold to the parent company. The fact that 95% of the proceeds from the sale of shares in the company are tax-free is also an advantage of setting up a holding company.
  • Distribution of risks: Potential risks are distributed and do not fall back on the parent company. If, for example, a new risky business area spun off in a subordinate subsidiary fails, the other associated companies remain unaffected.
  • Exclusion of liability and protection against insolvency: The parent company is generally not liable for the subsidiaries.
  • Relocation options the holding company’s registered office can be relocated to a more advantageous country from a tax point of view possible;
  • More accessible opportunities for expansion,
  • Easier sale of individual business units.

Disadvantages of a Holding Company

  • Dependence of the subsidiaries on the holding company,,
  • higher risk for subsidiaries (see under “Organisational holding company”),,
  • higher administrative costs due to the number of companies to be managed: Different contracts, the need for separate accounting for each subordinate company and the preparation of several annual financial statements.

If, despite these disadvantages, you decide to set up a holding company, you are welcome to contact our legal experts for the further procedure. We will review or prepare a business plan with you and provide comprehensive advice at every step. Feel free to contact us today to benefit from our services and expertise in corporate law.

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Practice Group: German Corporate Law

Practice Group:
German Corporate Law

Dr. Simon Krämer
Dr. Simon Krämer, LL.M.

Lawyer | Freelance