Holding-GmbH vs. Normal GmbH in Germany: Worth The Hassle?

This article is a bit of the missing piece on on the differences between a holding-GmbH in Germany versus a “normal” GmbH. I briefly mentioned the holding setup in how to found a GmbH company in Germany here, and I summarized all my “hacks” for founding and running German companies here. So now it’s time to go in-depth on the holding setup!

So how does the holding setup differ from just setting up a normal GmbH?
Here are the two scenarios:

• Scenario 1: Founding your GmbH directly, no holding company:
  This is the “boring”, normal scenario I talked about in the other articles. In short, your just found your GmbH company, and you own 100% of it. Simple.
  (Well, “simple” is always a relative term when dealing with company bureaucracy in Germany.)
• Scenario 2: Founding your holding company first which then founds your GmbH:
  This is the actual holding scenario. You found your holding company first (typically a UG, not a GmbH), and then, once that’s founded after 3-6 weeks (Germany is slow), that holding company goes on to found your actual GmbH company. So you end up with two companies in total. Notably, your GmbH company is owned by the holding company which itself is owned by you.

Okay. So what are the pros and cons here? I’ll compare the “normal” GmbH setup with the holding setup for you here. But there’s another elephant in the room which nobody is talking about: Another possibility is to simply not found a company and do stuff as a sole proprietor (Einzelunternehmen). This is often very beneficial. So I’ll include that in the following handy comparison table:

	Sole Proprietor	GmbH	GmbH via Holding-UG
Founding costs	Almost free	~1,000€	~2,000€
Founding duration	Instant, but wait ~4 weeks for tax ID for invoicing	~3-6 weeks	~6-12 weeks
Required capital (additional “cost”)	0€	25,000€ (or 12,500€)	25,000€ + 4,000€ (or 16,500€)
Taxation	Personal income tax rate: 0 – 45%	30% on yearly profits, and then 26% to pay out capital gains	30% on yearly profits, and then 26% to pay out capital gains (but can pay out to holding company before)
Admin costs	~100-300€ / month	~200-600€ / month + 2,000€ – 5,000€ / year	~200-600€ / month + 2,000€ – 5,000€ /year + 2,500€ / year
Bookkeeping complexity	Low	High	High

Okay, that was a lot to process. Oh man, where to start. I could go off and ramble about the abstract tax and admin differences I just laid out in the table above, but instead I’ll go ahead and just show you an example and you can decide for yourself which structure makes the most sense for you.

Quick disclaimer in between: Not a tax advisor, just sharing personal experiences, yadda yadda..

Example Scenario: One-person business, 100k€ profit

So let’s say you have a one-person business making 150k€ in revenue and 100k€ in profit. So that means you had 50k€ in expenses. How do the different company models compare?

Sole Proprietor

As a sole proprietor, you’d pay your personal income tax on that. So, entering the 100k€ into the official calculator , it looks like you’d be paying ~32.4k€ in taxes, resulting in an effective tax rate of 32.4%. Notably, this is a progressive tax, so every additional Euro you’ll be making would be taxed at 42%. Check out this interesting chart (yes, I’m serious, it’s interesting) which illustrates this:

Okay, so this is both good and bad: An average tax rate of ~32% is pretty good, but the gut feeling that any money you make additionally get’s taxed at 42% feels pretty bad. However, let’s pause that thought for now and look at the admin costs.

You have to do monthly bookkeeping in a simplified way (EÜR) and submit your monthly VAT payments (Umsatzsteuervoranmeldung). It’s reasonable to assume that you can get this done yourself with the current software out there. But, well.. when I was a sole proprietor in 2020-2021, I outsourced all of this to my tax advisor. It cost me 200 – 500€ / month, but I later realized my tax advisor was more on the expensive side. More reasonable tax advisors do this for 100 – 300€ / month, I’d say.

And then you have to add some additional sheets to your yearly tax return. Again, you can either do this yourself or your tax advisor can do this. I don’t remember any numbers here but it might cost another couple hundred Euros.

All in all, the costs and the administrative overhead are reasonable. Well, I mean.. in relative terms, right? This is all given the fact that you chose to live in one of the most bureaucratic countries on earth. Also, the bureaucracy for the next two company setups are way higher.

But before we move on, let’s briefly look at the setup procedure and costs. Setting up a sole proprietor business is the simplest business to set up. You “only” fill out one huge form (Fragebogen zur steuerlichen Erfassung), submit it via snail mail (yep) or Elster online (if you have an account, setup is clunky) and get your tax ID. Your tax ID (Steuernummer) is all you need to be able to issue invoices for clients. You usually get it in 2 weeks or, if your city is borderline dysfunctional like Berlin, 4 weeks.

So the summary here is that the sole proprietor business is easy to setup and easy to maintain. The drawbacks are that it’s coupled to your personal income tax rate which is progressive, so once you start earning a lot of money, that will get taxed at 42% – 45%. And there’s no limited liability as you’re liable personally. So don’t get sued and don’t sign factory rental contracts you won’t be able to pay.

Next up, the normal GmbH company setup.

One Normal GmbH Company

The taxation first. The GmbH’s yearly profits are taxed at a flat 30%. This is hugely simplified, as the tax actually depends on where your company is located – some cities in Germany have a lower tax rate which would effectively result in something like 25% or so. However, those are usually rural cities only weird humans want to live in. “Popular” cities like Berlin have the highest tax rate of 30%, and I don’t know of any startup which was founded in a low-tax city (interesting optimization idea though if you’re fine with the German rural life, surrounded by pensioners and supermarkets closing at 18:00).

Back to topic, the 30% flat tax on yearly profits, in our example of 100k€ profits, would lead to a tax of 30k€. So slightly less than in the sole proprietor setup. However! There’s a huge twist to this which some people forget: Sure, now your company has 70k€ after taxes on its bank account, but if you now want to pay out that money to your personal bank account (it’s called a dividend), you pay another 26% capital gains tax on that!

So there are effectively two tax rates in a GmbH, depending on what you want to do with the money:

• You want to “keep money in the company”, e.g. for building up some savings for hard times or investing next year (new employees, hardware, etc.):
  30% tax rate on profits, you keep the other 70% and use that for your investments.
• You want to “take money out of the company”, e.g. because it’s an established company and you have no reason to increase the money in the company bank account as you haven’t planend any new investments etc.:
  30% tax rate on profits, and on the remaining 70%, another 26% tax rate on capital gains when those profits are paid out to you as dividends.
  This results in an effective tax rate of:
  1 – ((1 – 0.3) * (1 – 0.26)) = 48.2%

Assuming the initial profit of 100k€, this leaves you with 70k€ after corporate tax and then with around 51.8k€ after capital gains tax. Yeah.

So, I won’t mince my words here – tax-wise, this is terrible! You’re effectively paying more taxes than with the sole proprietorship. Worse yet, it’s a flat tax and not progressive, so you pay 48.2% starting with your first Euro of profit. Damn!

I’d wager that most GmbH owners hadn’t thought this far when they founded their companies.

There are some hacks here, though: Because your GmbH can also pay you a director’s salary which again would be taxed progressively (same rates as for the sole proprietor), the situation is actually not completely terrible. If you remember, the maximum rate for the progressive income tax was 45%, while the rate for taking money out of the GmbH here is 48.2%. So it’s advantageous to pay out a large director’s salary. However, the financial authorities only allow you to pay yourself a director’s salary which is “market-rate”, so you’d have to compare what other similar businesses pay their directors.

I think it’s a pretty crazy thought that a state can define what sort of salaries companies should pay, but.. yeah, let’s not get into politics here yet, right, chuckle..

So that’s the taxation situation of the GmbH. What about the admin overhead? Well, it’s higher than for the sole proprietor. That’s because you have to do so-called double-entry bookkeeping which is usually not something normal humans can do. So you need a bookkeeper to do this, e.g. your tax advisor. This will cost more per month and scale with the amount if invoices you receive and send out. Typical prices are 200-600€ / month, but it really depends on the amount of invoices. I’d say we pay ~500€ / month for a software / consulting company with 5 team members.

However, on top of that, any GmbH is obliged to submit an annual financial report (Jahresabschluss) which realistically can only be created by your tax advisor and costs between 2,000 – 5,000€ per year, again scaling with your company’s revenue.

So the admin overhead costs are significantly higher for your GmbH.

How does the founding process look like? As described in my other post, it’s a clunky process which costs around 1,000€ and takes 3-6 weeks. This also involves going to a notary public who reads out your company founding documents to you (??) – yes, those are the same documents you essentially wrote yourself. Anyway.

And don’t forget that there are also the 25k€ in share capital you have to put into your GmbH initially. While German bureaucracy people like to say “those are not costs”, I beg to differ because, dude, it’s money taken out of your private account, so yeah, those are costs. Sure, those 25k€ are now in your company (and it can start paying the 1k€ founding costs with it, leaving your with 24k€, great), but they’re gone from your private account.

(You could found a UG for less, e.g. with 4k€ share capital, and later upgrade that to a GmbH.)

All of this earns you the privilege of limited liability, which is probably the biggest benefit of a GmbH. So if your company gets sued and goes bankrupt, you can “simply” shut down the company (spoiler: it’s not simple), but you’re not personally liable, so you keep your private savings etc.

Okay. So – mixed feelings about the GmbH. Its benefit is limited liability, but all other aspects look like drawbacks: Higher tax burden, clunky founding process, 25k€ “costs”, higher monthly admin costs, yearly financial statement costs, and generally just more bureaucracy.

Someone on Twitter once said that he’s “not a fan of the German GmbH”, and now I know what he meant.

There is a silver lining though, although it entails even more German bureaucracy. Ready? Let’s look at the holding structure.

GmbH Company Owned By a Holding – GmbH / UG

So this is the setup which I actually wanted to write about in this post, and it took me forever to get here. Anyway.. here goes. So this is the setup described earlier where, yes, you have a normal GmbH, but that GmbH is owned not by you, but a holding – GmbH or UG which itself is owned by you.

Let’s look at the tax implications first before we discuss the rest!

Assuming our 100k€ annual profit again, this is taxed by 30% in the GmbH, no much news here. However, here’s the “one big trick” which makes the holding structure interesting: When paying out those profits, a few things are different now:

• Those profits are not paid out to you, but to your holding company instead, because that’s the one which owns your GmbH, not you!
• Those profits are not taxed at 26% capital gains tax, but only at 1.5%!

So that’s the huge difference. With our 100k€ above, here’s the calculation:

• 100k€ yearly profit are taxed at 30% –> 70k€ remaining
• 70k€ are paid and out and taxed at 1.5% –> 68.95k€ remaining

So it’s a huge tax optimization. But what’s the drawback? The drawback ist that this money is now in your holding company, not in your personal bank account. If you’d now want to pay out the money from your holding company into your personal bank account (again, as dividend), it would be taxed at 26% again. So this would be just as bad as having a “normal” GmbH as described in the scenario above. It would even be slightly worse, because we now paid an additional 1.5% of tax. Ugh.

But what’s the real benefit? The real benefit is if you leave money in your holding company. The typical things people do are:

• Invest that money in ETFs:
  You could just buy a broad index ETF with the 70k€ and let that accumulate gains over time (e.g. the MSC ACWI, average performance of ~7-9% / year). And then, a few years later, you could pay out that money plus the gains. You’d still have to pay the 26% capital gains tax, but you essentially get an “interest-time advantage” because you were able to invest the 70k€ and let them accumulate returns before having to pay 26% capital gains tax when taking the money out.
• Invest in other companies:
  This is one of the more commonly-discussed ideas out there. You could take the 70k€ and invest in other companies, e.g. do angel investing in startups. The theory behind this is that, well, it’s obviously beneficial to be able to invest 70k€ instead of 51.8k€, which would be the sum you’d have if you wouldn’t have the holding company setup (26% capital gains tax etc.).
  But, more importantly, because these startups you invested in are also owned by your holding company, you get the same tax benefits as long as you hold more than 15% in them (simplified): When they pay out dividends in the future, you also only pay 1.5% tax. And if you sell your shares in them, you also only pay 1.5% tax! More on that later.
• Invest in property:
  This is an interesting idea which I’ve only heard some tax advisors suggest. Here’s the plan: With the 70k€, you purchase property. What sort of property? You could e.g. purchase a flat for yourself to live in. However, you’d still have to pay market-rate rent for it (= to your holding company) as otherwise it would be considered a “hidden dividend” (verdeckte Gewinnausschüttung). But, still, you get the idea, it’s easier to purchase a flat for 70k€ and rent it out to yourself than purchasing a flat for 51.8k€, which would be the money you’d get if you’d pay it out to yourself immediately (paying the 26% capital gains tax).
  There are also some more complex ideas out there: Some tax advisors suggest to purchase office space and then to rent out this office space to your GmbH. The idea here is that this 1) reduces the profits of the GmbH, leading to less corporate tax (the 30% tax) and 2) shifts profits into your holding company, where property income would only be taxed at 15%. So it’s essentially a tax optimization scheme.

So yeah, you get the idea – the summary could be “sure, you still pay 30% corporate taxes in your GmbH, but you can then move that money into your holding company tax-free (well, 1.5%) and invest in other stuff there”.

The big question for you would be 1) how much profit do you expect your GmbH to make and 2) how much “other stuff” you’d be interested in investing in. Thinking about those things should be pretty important when you’re considering the holding structure.

Also, the probably biggest benefit is if you sell your GmbH: Then, those profits are also only taxed at 1.5%, and again, you could use those to invest in something via your holding company. So if you plan to sell your GmbH at some stay, choosing the holding setup is actually a no-brainer.

Finally, what about the admin costs? Well, yeah.. those generally suck quite a bit. I’ll break it down here a bit more in addition to my table above.

Generally speaking, you have the admin costs of your GmbH (already high) and now also the admin costs of your holding company (kinda high). The one big difference here is that your holding company costs tend to be constant, because the revenue / complexity of your holding company tends to remain constant, while your GmbH admin costs tend to scale, because they scale with your GmbH revenue and that likely goes up over time.

That’s why, in my table above, I estimated the admin costs separately. Here’s the breakdown:

• GmbH: 200 – 600€ / month + ~2,000€ – 6,000€ / year
  (scales with revenue, number of invoices, etc.)
• Holding: ~2,500€ / year
  (no monthly costs, size and cost tends to be constant)

So you get the idea. Your admin costs go up, but only by a constant sum (= the admin costs of your holding company).

What about the founding process? Yeah, that sucks tremendously because you essentially have to go through the GmbH founding process twice. Here’s the rough process:

1. Found your holding company: 3-6 weeks.
2. Found your actual GmbH, owned by the holding company: Another 3-6 weeks.

There are some ideas on how to do this in parallel, but the TLDR of all of those tends to be “just do it sequentially and you’ll reduce the probability of legal headaches to zero”.

Conclusion: Holding-GmbH vs. Normal GmbH vs. Sole Proprietorship

So what’s the right type of business for you? That decision is yours to make.

Personally, I was a sole proprietor for ~2 years before setting up a holding structure. What made me do that was that I wanted to hire my first employee, and for some irrational reason, I thought “hey it’s better to have a GmbH if I start hiring people”. This is not true as sole proprietors can also hire employees.

Would I do it again? I’m not so sure. The complexity and admin costs of a German GmbH are really significant, and it’s not like you get huge tax advantages. Sure, now I have my holding company and there’s some money in that, invested in ETFs, so that’s cool, but I can’t really claim to have leveraged much of the tax benefits (buying property or whatever) so far.

Sometimes, I wonder how things would’ve turned out if I had kept things simple as a sole proprietor. I don’t know.

Then again, we’re in an industry in which people sometimes get sued (medical devices), so maybe the GmbH wasn’t a bad choice after all.

What about you? Leave a comment below 🙂