German holding company tax: what § 8b KStG gives you, and what it costs

Dividends upstream: 95 percent free, but two thresholds

Income within the meaning of § 20 (1) nos. 1, 2, 9 and 10(a) of the Income Tax Act is disregarded when determining a corporation's income under § 8b (1) sentence 1 of the Corporate Income Tax Act (Körperschaftsteuergesetz). § 8b (5) sentence 1 then treats 5 percent of it as expenses which may not be deducted, so 5 percent of the dividend is taxable and 95 percent is not.

The thresholds are the part most summaries get wrong, because there are two and they differ. For corporate income tax, § 8b (4) sentence 1 removes the exemption only where the participation was directly below 10 percent of the share capital at the beginning of the calendar year. For trade tax, § 9 no. 2a of the Trade Tax Act requires at least 15 percent at the start of the collection period, and § 8 no. 5 adds the dividend back where that test fails. A stake between 10 and 15 percent therefore gets corporate tax relief and pays full trade tax.

A 100,000 euro dividend, priced

Stake of at least 15 percent, municipal multiplier 400 percent, no other income at the holding.

• Taxable at the holding: 5,000 euros, being the 5 percent deemed non-deductible expense.
• Corporate income tax 750 euros, solidarity surcharge 41.25 euros, trade tax 700 euros from a base amount of 175 euros at a 400 percent multiplier.
• Total 1,491.25 euros. The holding keeps 98,508.75 euros of the 100,000.
• The same 100,000 euros taken personally instead costs 26,375 euros in capital yields tax and surcharge, leaving 73,625 euros.
• Assumptions: no add-backs, no loss carry-forwards, no church tax and a holding with no other activity. This is a model calculation for orientation, not tax advice.

Deferral now, saving at exit

On a running distribution the holding defers rather than saves. The 25 percent a private shareholder would pay waits until the money leaves the holding for private hands, so roughly 98.5 percent of the amount keeps working in the meantime instead of roughly 73.6 percent. For an owner who needs the cash to live on, it is a detour with extra paperwork.

The permanent advantage sits at the exit. Gains on the sale of shares in a corporation are disregarded under § 8b (2) sentence 1, with 5 percent treated as non-deductible under § 8b (3) sentence 1. A private sale of a stake of at least 1 percent falls under § 17 of the Income Tax Act, taxing 60 percent of the gain at the personal rate. On a 500,000 euro gain at a 400 percent multiplier, selling through the holding and extracting everything privately leaves about 362,600 euros, against about 367,100 euros on a private sale at a 42 percent marginal rate.

What the second company costs every year

• A second set of books, a second HGB annual financial statement, a second corporate and trade tax return, a second E-Bilanz and a second disclosure with the Company Register.
• A withholding tax return each time the subsidiary distributes, even though the dividend is 95 percent exempt at the holding.
• Notary and register costs for the formation and for any share exchange, plus advice on the structure itself.
• Group accounts in principle: § 290 (1) sentence 1 of the Commercial Code obliges a domestic parent that can exercise controlling influence to consolidate, though § 293 (1) exempts most owner-managed groups on size.
• A UG can be the holding and is taxed identically, but § 5a (2) sentence 2 of the GmbH Act excludes contributions in kind, which is exactly what a share exchange needs.

Getting in, and offsetting losses

The usual route into the structure is a qualified share exchange under § 21 of the Reorganisation Tax Act (Umwandlungssteuergesetz). The principle in § 21 (1) sentence 1 is recognition at fair value, which would trigger the full gain; sentence 2 permits book value on application where the receiving company demonstrably holds the majority of voting rights afterwards. A blocking period follows, because a sale within seven years triggers a retrospective contribution gain under § 22 (2) sentence 1, reducing by one seventh for each full year.

Offsetting losses needs more than common ownership. Each corporation is its own taxpayer, so a loss in the subsidiary stays there. Only a tax group (Organschaft) attributes income to the parent, and § 14 (1) sentence 1 of the Corporate Income Tax Act presupposes a profit transfer agreement within the meaning of § 291 (1) of the Stock Corporation Act, financial integration from the beginning of the financial year, and a term of at least five years actually performed.

How this runs in our software

Each company in the structure is kept separately, as German law requires: its own bookkeeping with AI account assignment, its own HGB annual financial statements, its own E-Bilanz, its own corporate and trade tax returns validated before transmission, and its own disclosure with the Company Register. The first annual financial statements per workspace are free, and a distribution produces the shareholders' resolution and the withholding return. Consolidated group accounts are a separate paid module, and personal assistance is available at 100 euros per hour after a free assessment.

Frequently asked questions

From what shareholding is a dividend exempt at a German holding?

Two thresholds apply. For corporate income tax, 10 percent of the share capital held directly at the beginning of the calendar year, under § 8b (4) sentence 1 of the Corporate Income Tax Act. For trade tax, at least 15 percent at the start of the collection period, under § 9 no. 2a of the Trade Tax Act. Between the two you save corporate income tax and still pay full trade tax.

Why is 95 percent exempt and not 100?

§ 8b (1) sentence 1 leaves the dividend out of income entirely, and § 8b (5) sentence 1 then deems 5 percent of it to be non-deductible expenses. That 5 percent is taxed at ordinary corporate and trade tax rates, which is why the effective burden is roughly 1.5 percent at a 400 percent multiplier.

Why does only 73,625 euros of a 100,000 euro dividend arrive?

Because deduction at source is independent of the exemption. § 43 (1) sentence 3 of the Income Tax Act requires the deduction irrespective of § 8b of the Corporate Income Tax Act, so the subsidiary withholds 25 percent plus the solidarity surcharge. The amount is credited later in the holding's own assessment, typically more than a year afterwards, so plan working capital around the net figure.

Does a holding save tax or only postpone it?

On running distributions it postpones, because the private layer of tax arises when the money leaves the holding. The genuine saving is at a sale: 95 percent of a gain on shares is untaxed under § 8b (2) and (3), while a private sale under § 17 of the Income Tax Act taxes 60 percent of the gain at the personal rate.

Is a holding worth it if a sale is already planned?

Often not. After a book-value contribution the blocking period of § 22 (2) of the Reorganisation Tax Act runs seven years and reduces by one seventh a year, so an early sale pulls most of the deferred gain back into tax. If the proceeds go private immediately, the holding also loses its edge below a personal rate of roughly 43 percent.

Can I offset subsidiary losses against holding profits?

Not without a tax group. Each corporation is a separate taxpayer and losses stay where they arise. A tax group under § 14 (1) of the Corporate Income Tax Act requires a profit transfer agreement, financial integration from the start of the financial year and a term of at least five years actually performed.

Primary sources and scope

Authoritative references for the key claims on this page. Check the current text before making a filing or accounting decision.

• § 8b Corporate Income Tax Act (KStG), participation exemption
• § 43 Income Tax Act (EStG), deduction at source
• § 290 Commercial Code (HGB), duty to consolidate
• § 5a GmbH Act (GmbHG), the UG special rules