Selling Through a Holding Company: How § 8b KStG Cuts the Tax Rate

Where one corporation sells shares in another corporation, 95 percent of the gain remains tax-exempt — that is what § 8b KStG (the German Corporation Tax Act) provides. Where the same person sells the same shares directly out of private assets, 60 percent of the gain is taxed at their personal rate.

For the sale of an Austrian limited company, our approach to selling a GmbH covers the process from valuation to the notarial deed.

On a multi-million sale, the gap between those two sentences is a six-figure sum. It is not settled in the negotiation but years earlier, in the answer to a single question: who holds the shares. What follows deals with the structure behind the transaction — the holding company, its effect and its pitfalls. It describes German law and is no substitute for tax advice.

What § 8b KStG provides

The rule itself is short. Gains realised by a corporation on the disposal of shares in another corporation are to be left out of account when determining income (§ 8b para. 2 KStG). Five percent of the gain, however, is treated as non-deductible business expenditure (§ 8b para. 3 KStG).

The result is that 95 percent of the disposal gain is tax-exempt. Corporation tax, solidarity surcharge and trade tax fall due only on the remaining five percent. Depending on the trade tax multiplier applicable to the holding company, the effective burden is therefore in the order of one and a half percent of the gain.

Compare the direct sale. Where an individual holds the shares as private assets and the participation is at least one percent, the partial income method under § 17 EStG (the German Income Tax Act) applies. Sixty percent of the gain is taxable, 40 percent remains exempt. At the top rate of 45 percent, that produces an effective burden of 27 percent, plus solidarity surcharge.

A worked example

A simplified example, deliberately without church tax and second-order effects. Sale price of the GmbH shares: five million euros. Acquisition cost: EUR 500,000. Disposal gain: EUR 4.5 million.

	Direct sale (private assets)	Sale via holding company
Taxable portion	60 % = EUR 2.70m	5 % = EUR 225,000
Rate applied to it	personal rate, up to 45 %	approx. 30 % (corporation and trade tax)
Tax burden (rounded)	approx. EUR 1.2m	approx. EUR 68,000
Effective burden	approx. 27 %	approx. 1.5 %

The difference in this example: more than one million euros. The precise figures depend on the trade tax multiplier, the solidarity surcharge and the individual situation — the actual computation belongs with your tax adviser. None of that changes the order of magnitude.

The catch: the money sits in the holding company

The 95 percent exemption comes with a condition that never makes it into a headline: the sale proceeds flow to the holding company, not to you.

For as long as the money stays there, almost nothing has happened. The holding company can reinvest — in new participations, securities, property — and does so with capital that is very nearly untaxed. Anyone who intends to reinvest the proceeds anyway has, in the holding company, a vehicle built for exactly that.

Anyone wanting to draw the money into private hands, by contrast, picks up the tax later: the distribution to the shareholder is subject to withholding tax on investment income of 25 percent plus solidarity surcharge. The tax advantage of a holding company is therefore not a gift but a deferral effect — powerful for reinvestors, limited for anyone who wants to live off the proceeds.

That single question — reinvest or draw down? — decides the structure. It should be answered before anyone incorporates a holding company.

The blocking period: why the holding company has to exist years before the sale

The obvious idea is tempting: contribute the shares to a holding company shortly before the sale, then sell tax-free. The blocking period was built for precisely that.

Where shares are contributed to a holding company in a tax-neutral qualified share exchange, the shares received are subject to a blocking period of seven years (§ 22 UmwStG, the German Reorganisation Tax Act). If the holding company sells within that period, the contribution is taxed retrospectively on a pro-rata basis — the advantage melts away by one seventh for each year that has elapsed.

In practice that means a holding company created only in the year of the sale contributes next to nothing to that sale. A holding company that has stood for three years contributes three sevenths. The full effect belongs to whoever had seven years of lead time — or set the structure up from the outset so that the holding company has held the shares since incorporation.

The holding company is therefore not a sale trick but a structural decision taken many years before the exit. It belongs in the same early phase as the topics covered under preparing your exit: anyone who considers an exit possible in five to ten years should settle the structural question with their tax adviser now, not in the year of the sale.

Who the structure pays off for — and who it does not

A holding company pays off for shareholders who intend to reinvest most of the proceeds, who hold or are building several participations, or who still have years to go before the sale. It also pays off for owners selling in stages — a majority first, the remainder later — because every tranche benefits from the exemption.

It does not pay off for shareholders selling in the short term who need the proceeds privately: the blocking period devalues late incorporation, and the withdrawal claws the tax back. It also carries running costs — bookkeeping, accounts, administration — which on small participations can swallow the benefit.

What the shares at issue here are worth is established by a company valuation. How the process runs from the first conversation to closing is described under selling your company.

FAQ

Does § 8b KStG apply to trade tax as well?

In principle yes: the exemption takes effect for trade tax purposes too, so that the effective overall burden stays at around one and a half percent. The detail depends on the structure and belongs with a tax adviser.

Can I still set up a holding company once the buyer is at the table?

You can set one up, but you will scarcely benefit. Where the contribution is made shortly before the sale, the seven-year blocking period applies, and the retrospectively taxed contribution gain largely eats up the advantage. The structure works for the next sale, not the current one.

How much of the benefit survives if I sell after three years?

Three sevenths. The blocking period reduces the retrospective taxation by one seventh for each completed year, so the advantage builds up gradually and is only complete after seven years.

Why is 95 percent exempt rather than 100 percent?

Because five percent of the gain is treated as non-deductible business expenditure under § 8b para. 3 KStG. Corporation tax, solidarity surcharge and trade tax are levied on that portion, which is what produces the effective burden of roughly one and a half percent.

What tax applies when I take the money out of the holding company?

The distribution to the shareholder is subject to withholding tax on investment income of 25 percent plus solidarity surcharge. That is why the exemption is best understood as a deferral rather than a permanent saving for anyone who needs the cash personally.

Does the structure work for a staged sale?

Yes. Owners who sell in tranches — a majority first, the remainder later — benefit from the exemption on each tranche, which is one of the situations where the structure is most worthwhile.

And what about Austria?

This article describes German law. In Austria, disposal gains realised by individuals are subject to the special tax rate of 27.5 percent; separate rules apply to participations held as business assets of corporations. The Austrian sequence, with the notarial deed and the Firmenbuch (the Austrian companies register), is described in notarial deed and Firmenbuch: the share sale in Austria.

Selling a business is the most important transaction of an entrepreneurial life. Take independent, discreet advice — IGCP Capital Partners. → igcp.at