1. Specific holding company regime(s)
    1. Key tax features for holding companies whose legal form is a German resident corporation
  2. Attractive features of the German corporate tax regime

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Germany
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Specific holding company regime(s)

Germany has no specific tax regime for holding companies, but such entities can make use of the beneficial tax treatment for dividends and capital gains, which are features of the general corporate tax regime.

General taxation of holding companies

  • Corporate income tax at a rate of 15.825% (including the ‘solidarity surcharge’) and trade tax at a rate between 7 and 21% (depending on the location of the holding), typically amounting to about 14 to 17%.
  • A 95% tax exemption (leading to a tax burden of typically around 1.6 %) applies to:
  • dividend income, provided the minimum shareholding requirement of 10% for corporate income tax purposes and 15% for trade tax purposes is satisfied; and
  • capital gains from the sale of shares in corporations (with no minimum shareholding or minimum holding period required).
  • The treatment of interest income from shareholder loans depends on the tax character of such loans as debt-like or equity-like instruments.

Group tax regime

  • Holding companies may make use of the German group tax regime (Organschaft), which permits pooling the profits and losses of the group members at the level of the parent company. Use of this regime is strictly subject to various requirements, including the conclusion and execution of a profit and loss transfer agreement for a period of at least five years.
  • A key benefit of the regime is that any profit transferred from a subsidiary group member to the parent company will not trigger the 1.6% tax burden mentioned above in relation to dividends.

Withholding taxes

  • Dividends paid by a German corporation to its parent are subject to withholding tax at a rate of 26.375%. However, the parent may benefit from an exemption if such withholding tax would permanently exceed the corporate income tax of the parent company.
  • 0% rate of withholding tax on outbound dividends based on the EU Parent Subsidiary Directive. In order to benefit from the exemption, the parent company needs to be subject to corporate income tax in another EU Member State and have owned a minimum direct shareholding of 10% during a minimum holding period of one year. The exemption is also available if the shares in the German subsidiary are held through a permanent establishment of the parent company in another EU Member State.
  • Parent companies in other jurisdictions will need to rely on a double tax treaty (of which Germany has a wide network) in order to benefit from a reduced rate of withholding
  • 0% rate of withholding tax on interest payments. There is generally a 0% rate of withholding tax on interest payments on shareholder loans (unless such loans are equity-like instruments).

Attractive features of the German corporate tax regime

German holding companies benefit from a 95% tax exemption on qualifying dividends and capital gains which – depending on the overall composition of the holding company’s income – may result in a tax burden of as low as approximately 1.6%. Additionally, the German group tax regime may be used to achieve an attractive level of taxation. Germany’s vast treaty network, the EU Parent Subsidiary Directive and domestic rules combine to provide a withholding tax regime that is well-suited to holding companies.