Definition and legal basis of the operating company
The term operating company describes, in German commercial and corporate law, a company that carries out the actual operational business activity. It stands in contrast to the holding company, which is especially referenced in structuring scenarios involving operational splits or in the context of group structures. The legal relevance of the operating company extends across various areas of law, including corporate law, tax law, labor law, and insolvency law.
Corporate law classification of the operating company
Legal entity and legal forms
An operating company may take any legal form permitted under German law, particularly sole proprietorships, partnerships (e.g., oHG, KG, GbR), or corporations (e.g., GmbH, AG). For the purposes of corporate classification, the decisive factor is who holds ownership of the operational business or economic activities.
Separation between operating and holding company
The distinction from the holding company plays a significant role in corporate structuring. While the holding company owns essential operational assets, such as real estate or machinery, the operating company conducts the commercial or production business. When it comes to contract drafting and liability, a careful differentiation must be made between these two companies.
Operating company in tax law
Significance in the context of operational split
In tax law, the operating company is a central concept in the context of the so-called operational split. In such a scenario, the holding company (usually in the form of a separate company or as a sole proprietorship) holds the economic assets and allows the operating company to use them. Both companies are legally independent, but are closely linked on an economic, organizational, and personnel level.
The legal requirements for an operational split are in particular:
- Existence of a holding company and an operating company,
- Transfer of essential business assets,
- Personnel linkage through aligned majority shareholdings.
From a tax perspective, the operating company bears the risks of the operational business, while the holding company regularly generates rental or lease income.
Income tax implications
For the operating company, there are income tax consequences, especially with regard to § 15 EStG (income from trade or business). Recognition as an operating company for tax purposes affects profit taxation, trade tax liability, as well as the valuation of assets in business assets.
Specifics of value-added tax
The operating company is regularly considered an independent entrepreneur within the meaning of the German VAT Act (UStG) and is independently subject to VAT. Especially in connection with operational splits, it must be assessed whether the requirements for a VAT group (§ 2 para. 2 no. 2 UStG) or for transactions between affiliated companies are met, which may be relevant under VAT law.
Operating company under labor law
The operating company assumes obligations under labor law, as it acts as an employer in relation to its employees. In labor disputes – such as in cases of business transfers or with respect to employee participation rights – it must always be determined which company actually holds the employer position.
Business transfer according to § 613a BGB
If an economic unit is transferred to another company, the protection under § 613a BGB (business transfer) applies. Employer obligations are transferred to the new operating company, while employment relationships fundamentally continue unchanged.
Operating company in insolvency law
If insolvency proceedings are opened over the assets of the operating company, the insolvency regulations are decisive for the settlement process. If there is a separate holding company, obligations under the law of obligations, such as lease or rental agreements, must be considered separately. Claims of the holding company against the insolvent operating company are asserted as insolvency claims or as rights to segregation or separation.
Operating company under group and transformation law
In group law, the operating company plays an essential role as the operational unit within the group. Through specific holding structures, holding and operating companies are often transferred into separately liable corporate entities to manage liability risks. Under transformation law, the operating company may be spun off, merged, or divided in whole or in part, with corporate and tax implications to be observed.
Summary
The operating company is a central concept in German business practice and has a variety of legal meanings. In various areas of law – from corporate structuring and tax planning (in particular operational split), to labor and insolvency law issues, and group and transformation law – the precise definition and distinction of the operating company is decisive. The treatment of the operating company therefore always requires a comprehensive legal analysis with regard to the specific situation and the relevant legal area.
Frequently Asked Questions
What are the legal framework conditions for contracts between an operating company and a holding company?
The contractual relationship between an operating company and a holding company is generally based on lease, rental or service agreements. The legal framework is primarily determined by the German Civil Code (BGB) and, depending on the legal form of the entities involved, by the German Commercial Code (HGB), the Limited Liability Companies Act (GmbHG), or the Stock Corporation Act (AktG). Particular attention should be paid to the requirements for written form for rental and lease agreements (§ 550 BGB), non-compete clauses, proper price structuring (especially for group companies within the meaning of §§ 291 ff. AktG and the Transfer Pricing Ordinance), as well as the appropriateness of contractual terms in order to avoid tax disadvantages or hidden profit distributions. In group scenarios, there is often a reporting obligation as well as an obligation to disclose the terms of the contract and any intra-group service links.
What tax aspects must be considered for operating companies?
Operating companies are particularly relevant regarding income tax, VAT, and where applicable, trade tax. In the event of an operational split between a holding company and an operating company, the distinction between business and private assets is crucial since essential operating assets must be assigned to the business assets. Tax risks especially arise with lease or rental agreements at non-arm’s-length terms, which the tax authorities may classify as hidden profit distributions (§ 8 para. 3 KStG) or excessive expenses (§ 4 para. 5 EStG). The separation between holding and operating company can also impact input tax deduction and the formation of VAT groups under § 2 para. 2 no. 2 UStG.
What commercial law obligations apply to an operating company?
As merchants, operating companies are subject to the commercial law provisions of the HGB, particularly the obligation to keep accounts (§§ 238 et seq. HGB), the obligation to prepare annual financial statements (§ 242 HGB), and, where applicable, the obligation to have accounts audited (§ 316 HGB) and to make disclosures (§ 325 HGB), provided certain thresholds are exceeded or a particular legal form is used. If part of a group of companies, further requirements may apply to the consolidated financial statements (§§ 290 et seq. HGB) and the preparation of a management report (§ 289 HGB).
When does an operational split exist in legal terms and what are its consequences?
An operational split legally exists if the holding company leases or rents a significant operating asset (usually real estate or qualifying business assets) to the operating company and there is a personnel linkage by participation of the same persons in both companies. The legal consequences primarily concern tax law: both companies are treated as a tax unit, with effects on income generation, assets and liability, as well as the tax treatment of disposals or transfers.
What must be considered in terms of the liability of the operating company in relation to the holding company?
The operating company is generally liable only for its own contractual obligations vis-à-vis the holding company and third parties. However, in the case of group relationships or an operational split, liability may be extended by de facto or contractual guarantees, comfort letters, or surety declarations. The so-called “piercing the corporate veil” may also be relevant, for example if assets are commingled or the holding company exercises impermissible influence on the operating company. Careful contract design, clear separation of business areas, and compliance with capital maintenance requirements (§ 30 GmbHG, § 57 AktG) are imperative to minimize liability risks.
What labor law specifics apply to an operating company within a group structure?
In group structures, particular labor law aspects arise especially regarding co-determination (§§ 1 et seq. BetrVG), the use of temporary agency workers (§ 1 AÜG), and in connection with business transfers under § 613a BGB. Distinguishing the employer role is essential to ensure the applicability of the Works Constitution Act and collective agreements. The group works council (§ 54 BetrVG) may also be relevant when the operating company stands in a superior relationship with other group companies. Special attention must also be paid to the information and consultation rights of employee representatives as well as the adherence to collective and statutory protective regulations.
What are the possibilities and limitations for the corporate structuring of an operating company?
The legal structuring of an operating company is, in principle, free under German company law but is subject to statutory limitations. The possible forms include in particular the GmbH, the stock corporation (AG), the limited partnership (KG), or the GmbH & Co. KG. The respective requirements for formation, capital raising, management and representation, as well as publication obligations are legally regulated (in particular in the GmbHG, AktG, or HGB). Limitations arise from the prohibition on immoral structuring, the prohibition on circumventing creditor protection regulations, and any specialized statutory licensing or approval requirements, especially for regulated industries. Tax efficiency, avoidance of liability, and flexibility in company management play an essential role in choosing the appropriate legal form.
