Legal basis and practical implementation

An asset management GmbH is a corporation without any operating business of its own whose purpose is to manage its own assets and to derive profits from these assets. 

Since the flat-rate withholding tax was introduced, investors have increasingly focused on the asset management GmbH, particularly since private investors are denied deducting income-related expenses, and offsetting losses has also been heavily restricted. But other advantages, such as preferential treatment of profits from shares, also make the asset management GmbH an interesting option for many investors. 

Let’s compare a private capital investor with the asset management GmbH: 

The private investor

Since the flat-rate withholding tax was introduced, capital gains (simply put dividends and gains on disposal) are subject to fixed-rate withholding tax directly at source. The withholding tax is withheld by the custodian bank and transferred straight to the tax office. It is taxed at 25 percent plus solidarity surcharge, and church tax as applicable. The tax-free savings allowance, which is currently 1,000 euros, can be applied, but all income-related expenses associated with the investment income are considered discharged. 

The asset management GmbH

The investments are made through an asset management GmbH. The separation principle applies, that is, the asset management GmbH is itself a taxable entity and independently pays corporate income tax on its profits at 15 percent, plus 5.5 percent solidarity surcharge, and trade tax at 12-17 percent, depending on the municipality entitled to charge the tax. 

However, only 5 per cent of the profits from the sale of shares in a GmbH are to be taken into account (Section 8b (2) and (3) of the Corporate Income Tax Act [Körperschaftsteuergesetz – KStG]). This corresponds to a tax liability of around 1.5 percent. Costs of disposal are not deductible for tax purposes.

The participation exemption under Section 8b KStG can also be applied to dividends. The condition for the income being treated as almost tax-free is that at the beginning of the calendar year in question, the asset management GmbH holds at least 10 percent of the share capital or nominal capital of the profit-making corporation for corporation tax purposes and 15 percent for trade tax purposes. Realistically, you do have to consider that having a 10 or 15 percent stake in a larger listed company is rather rare.

But if liquidity is to flow back from the asset management GmbH to private investors, this is generally only possible by way of a distribution, which in turn triggers tax. 

Furthermore, it should be noted that the corporation must first be set up, which involves formation costs, payment towards the share capital and registration costs. In addition, annually recurring costs for financial accounting, preparing and publishing (or filing) financial statements, preparing and submitting tax returns and reviewing tax assessments or applying for and renewing LEI codes each year must be taken into account. 

To keep these costs in proportion, further planning should only be continued if a long-term strategy with the intention of operating as a commercial investor on a permanent basis has been established. The investment is supposed to serve the long-term accumulation of capital. The invested amount should therefore not be needed in the short term for “personal reasons”. When investing via a GmbH, both the invested amount and the generated income normally remain in the GmbH. No capital repayments or profit distributions are made during the year. 

At this point, many other capital investments can be highlighted, and their benefits and drawbacks for tax can be compared.

Long-term strategy often advantageous from a tax perspective

All in all, it can be said that, from a tax point of view, when pursuing a long-term investment strategy (including taking into account establishment and running costs), in many ways using an asset management corporation makes sense. But one last aspect should not be ignored – calculations should always include the fact that the return of funds to natural persons as a distribution is subject to 25 percent withholding tax plus solidarity surcharge, and church tax as applicable.