Definition and Legal Foundations of the Holding Company
A holding company under German law is a company that, particularly within corporate structures, acts as an asset or real estate company and is limited to holding and managing assets, especially real estate. The holding company makes assets—mainly land, buildings, or movable assets—available to one or more operating companies for use in return for payment. Holding companies are typically closely linked to the so-called ‘Betriebsaufspaltung’ (operational split), in which legally separate companies collaborate.
Legal Forms and Distinctions
Permissible Legal Forms
Holding companies can take various legal forms. The following company forms are frequently chosen:
- Civil Law Partnership (GbR)
- General Partnership (OHG)
- Limited Partnership (KG)
- GmbH & Co. KG
- Limited Liability Company (GmbH)
- Sole Proprietorship
The choice of legal form is determined by business management, tax, and liability considerations.
Distinction from the Operating Company
In contrast to the holding company, which performs purely asset management functions, the so-called operating company conducts the operational business. The separation between holding and operating company serves, in particular, to safeguard assets or to optimize tax structuring.
Holding Companies in the Context of Operational Split (Betriebsaufspaltung)
Principle of Operational Split
The operational split (Betriebsaufspaltung) is a concept from German tax law. It exists when
- a holding company provides an operating company with essential business assets (in particular land, buildings, machinery) for use (factual linkage), and
- there is a personal linkage, meaning the shareholders of both companies are identical or closely connected personnel-wise.
Tax Law Particularities
When an operational split exists, there is tax equal treatment of the holding company with operating companies. The asset-managing holding company is classified as a commercial enterprise for tax purposes, which means that it is subject to trade tax. Rental income from the transfer of real estate or movable fixed assets is then considered business income.
Consequences of the Operational Split
- Trade Tax Liability: Even purely asset-managing holding companies are subject to trade tax.
- Co-entrepreneur Status: The shareholders of the holding company are deemed co-entrepreneurs and participate in the business income according to their shares.
- Special Business Assets: Assets made available for use are allocated to the special business assets of the holding company and must be accounted for accordingly.
- Tax Group for Income Tax Purposes: The allocation of income between holding and operating companies can affect the overall tax burden and loss offsetting.
Civil Law Aspects
Contractual Relationships between Holding and Operating Companies
The business relationship between holding and operating companies is generally contractually regulated, mostly through lease or rental agreements. These contracts must withstand the so-called third-party comparison, meaning the agreed terms must correspond to those that would also be concluded between independent contracting parties.
Liability Issues
Depending on the chosen legal form of the holding company, the shareholders are liable in different ways:
- Partnerships: Here, the shareholders are often personally and fully liable.
- Corporations (e.g., GmbH): Liability is limited to the company’s assets.
The separation of liability between holding and operating company is a commonly pursued goal in practice to protect assets from operational risks.
Holding Companies in Corporate Restructuring Law
In the context of restructurings, such as those involving trading companies, holding companies can arise through spin-offs or carve-outs. The Transformation Act (UmwG) governs the transfer of assets and obligations between the involved companies. This is particularly relevant in cases of business succession or group formation.
Holding Companies in Insolvency Law
In the event of insolvency of the operating company, creditor access is limited to the assets of that company. The holding company remains generally unaffected by the insolvency of the operating company. Conversely, insolvency of the holding company affects the existence and usability of assets within the operating company. Attention must be paid in particular to avoidance rules and the possibilities for continuation pursuant to §§ 103 et seq. of the Insolvency Code (InsO).
Holding Companies from a Tax Perspective
Income Tax and Corporate Income Tax
The income of the holding company, where an operational split exists, is treated as business income and is subject to income tax or corporate income tax accordingly.
VAT Treatment
The provision of real estate or movable business assets by the holding company to the operating company for remuneration constitutes a service subject to VAT. Under certain conditions, the option for VAT liability or for exemption is possible (§ 9 UStG).
Valuation and Depreciation
The assets provided for use are recognized as assets in the holding company’s balance sheet and depreciated over their useful economic life. This affects the determination of taxable profit.
Advantages and Disadvantages of Holding Companies
Advantages
- Risk minimization through asset separation
- Advantageous for business succession and restructuring
- Tax structuring opportunities
- Flexibility in the management and use of tangible assets
Disadvantages
- More complex tax and legal handling
- Increased requirements for contract drafting (especially third-party comparison)
- Risk of a tax operational split with trade tax liability
Disclosure Obligations and Reporting
If the holding company is a company required to keep accounts (especially certain corporate forms), the provisions of the German Commercial Code (HGB) and disclosure obligations apply, such as under §§ 325 et seq. HGB.
Literature References
For an in-depth study, the following sources, among others, are useful:
- Münchener Handbuch des Gesellschaftsrechts, chapter on Betriebsaufspaltung and Holding Companies
- Tipke/Lang, Steuerrecht
- Kirchhof, Income Tax Commentary
- Baumbach/Hopt, Handelsgesetzbuch
Summary: The holding company is a central concept in German business and tax law and is of particular importance in the context of the operational split and the asset structuring of companies. Legally, the holding company is characterized by a multitude of regulations covering civil law, company law, tax law, and insolvency law aspects. The establishment and management of a holding company requires careful legal and tax planning to make optimal use of potential benefits and to limit risks.
Frequently Asked Questions
Must a holding company necessarily be operated as an independent legal entity?
A holding company can be structured as an independent legal entity (e.g., GmbH, AG) or as a partnership (e.g., GbR, OHG, KG) or sole proprietorship. Legally, there is no compulsory requirement as to the legal form a holding company must take. However, the choice of legal form brings different legal consequences, for example regarding liability, power of representation, and disclosure obligations. Legal entities provide liability protection for shareholders, while in partnerships there may be at least partial personal liability. Capital structure, co-determination rights, and tax implications may also vary depending on legal form and should be carefully considered before establishment or restructuring.
Which legal provisions must be observed when setting up a holding company?
The formation of a holding company is subject to the general civil and company law provisions of the chosen legal form. For example, in the case of forming a GmbH, the rules of the GmbH Act (GmbHG) apply, whereas for a KG or OHG the German Commercial Code (HGB) is relevant. In addition, any necessary business licenses must be obtained if the holding company itself engages in commercial activities or performs certain functions. From a tax perspective, it should be ensured that the separation between holding and operating company meets the requirements for tax recognition of the structure. In particular, when outsourcing operating assets, careful and contractually clear allocation of assets must be observed in order to minimize tax and legal risks.
How should the legal relationships between holding company and operating company be structured?
The legal relationships between holding and operating company are generally regulated through lease or rental agreements, in which the holding company provides the operating company with assets, often real estate, land, or machines, for use. From a legal perspective, these contracts must withstand an arm’s length comparison, meaning that the content and terms must be structured as they would be between unrelated third parties, in order to gain company and tax law recognition. It is regularly recommended that all arrangements be documented in writing, particularly regarding rent or lease amounts, duration, termination rights, maintenance obligations, and cost allocation. Additionally, the allocation of responsibilities and liability for damages or downtime should be regulated clearly in legal terms.
Which liability aspects must be considered in holding companies?
The liability of a holding company depends on its legal form. For a legal entity, usually only the assets of the holding company are liable, whereas in partnerships or sole proprietorships there may be personal liability of the partners or owner. It should be noted that the holding company is liable for the proper leasing and maintenance of the assets provided, as per the lease or rental agreement. In addition, liability risks may arise from public law provisions, such as emission control law or building regulations. In particular, note that the holding company is not liable for obligations of the operating company, unless it has provided corresponding guarantees or sureties.
What formal requirements apply to contracts between holding and operating companies?
Contracts between holding and operating companies are subject to the same formal requirements as other lease or rental contracts. Especially for leases of land and real estate, note that under § 550 of the German Civil Code (BGB), a written form clause is required for long-term leases; otherwise, the tenancy is deemed to be for an indefinite period. The essential contractual terms, such as rental property, rental amount, and contracting parties, must be determined in writing. In addition, any amendments and supplementary agreements should also be documented in writing to ensure legal certainty and evidential value.
Are there statutory disclosure obligations for holding companies?
The disclosure obligations of a holding company depend on the legal form chosen. Corporations, such as GmbHs and AGs, are required under § 325 HGB to publish their annual financial statements. Partnerships are generally only required to disclose if they do not have a natural person as a fully liable partner (e.g., GmbH & Co. KG). Furthermore, holding companies acting as landlords of real estate may be subject to the reporting obligations under the Money Laundering Act (GwG), especially if beneficial owners have changed through acquisition or transfer of shares. In cases of group-linked structures, additional disclosure requirements may apply regarding the relationship between the companies.
What legal risks are associated with the abusive structuring of holding companies?
From a legal perspective, abusive structuring is problematic in particular with regard to tax purposes or to circumvent labor or company law obligations. The tax authorities examine on a case-by-case basis whether there is truly an independent rental or leasing activity or whether a sham structure has been created. If an inappropriate tax structure is identified (e.g., through excessive rent/lease charges or lack of actual use), it may be deemed an abuse of legal arrangements within the meaning of § 42 of the Fiscal Code (AO), leading to non-recognition of the structure or the imputation of an operational split. Abusive structuring can also result in the nullity of contracts or in piercing the corporate veil under civil law, for example, if company law separation principles are not adhered to.
