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Building assets with ETFs in an asset management GmbH [limited liability company] as opposed to private assets (Part 2)

The effects of compound interest while building assets are mainly impacted by the tax implications. In the previous article we had a look at private investors. Here, in part 2, the focus is now on the tax implications for investments in the business assets of a GmbH as opposed to private assets.

Assessment of the advantages of an asset management GmbH 

In the previous article we highlighted that, following the sharp rise in interest rates, currently, there is usually tax parity between distributing and accumulating sister ETFs. This will apply irrespective of whether the securities are held in private or business assets.

Attention also needs to be paid to the fact that the predetermined tax basis means that, particularly in the case of accumulating securities, exceeding the flat-rate savers’ allowance within the meaning of Section 20(9) of the Income Tax Act (Einkommenssteuergesetz, EStG) could trigger tax payments in private assets even though no cash inflow has taken place. Consequently, an effective tax rate of 26.375 % would be applied. 

In such a case, for wealthy private individuals, using a corporation (normally a GmbH) could constitute an advantage in order, for example, not to have to manage ETFs in their private assets. The background is generally the positive effects generated by compound interest as a result of the temporary tax deferral in the business assets of a GmbH when compared with private assets.

The relevant factors for assessing the advantages of an asset management GmbH are, besides the amount, composition and source of the assets, also the investment strategy, investment horizon and the plans for how to use the assets at the end of the investment horizon. In this context, in the following section, we show, by way of example, the relevant tax implications resulting from income from equity ETFs. We likewise present the tax implications of direct investments in individual shares to highlight the difference.

Tax implications in the case of income from equity ETFs and ...

For the taxation of income from equity ETFs it is necessary to differentiate between the various types of income (realised capital gains, distributions and pre-determined tax bases), which are bracketed together as investment income within the meaning of Section 16 of the Investment Tax Act (Investmentsteuergesetz, InvStG). In the case of an asset management GmbH, under Section 20(1) sentence 3 InvStG, just 20% of  investment income from equity ETFs would be included in taxable income for corporation tax purposes. By contrast, under Section 20(5) InvStG, 60% of the income would be included in the assessment base for trade tax purposes. 

Note on private assets: The above-described partial exemption under Section 20(1) sentence 1 InvStG for income from equity ETFs in private assets is 30%. 

... in the case of income from shares

On account of the attractive income tax rules for corporations with respect to investments in (individual) shares we have provided a comparison of the tax implications with direct investments. For the taxation of income from shares a distinction likewise has to be made between the different types of income (realised capital gains, dividends).

In the case of an asset management GmbH, under Section 8b(2) in conjunction with (3) of the Corporation Tax Act (Körperschaftsteuergesetz, KStG), irrespective of the size of the shareholding, realised capital gains will effectively be reduced by 95% in the tax assessment base (off-balance sheet) while, in the case of dividends, the size of the shareholding will always have to be taken into account. For corporation tax purposes, under Section 8b(1) in conjunction with Section 8b(4) and (5) KStG, dividends would only be taxed similarly to capital gains if the shareholding in the distributing incorporated company was at least 10% at the start of the calendar year. For trade tax purposes, under Section 9, no. 2a of the German Trade Tax Act, the shareholding even has to be 15% in order to reduce the dividend by 95% in the assessment base. 

Note on private assets: Under Section 20(9) EStG, the amount by which the realised capital gains and dividends exceeds the flat-rate savers’ allowance has to be fully included in the tax assessment base.

Differences in the tax implications

If the solidarity surcharge is included and it is assumed that trade tax will be charged at a rate of 15% then this would give rise to the following tax implications (when limited to the GmbH level and capital gains):

  Asset management GmbH Private assets
Equity ETF 12.17% 18.46%
Shares 1.54% 26.38%

If you create an asset management GmbH for your investments in equity ETFs, it would be possible to reduce the effective rate of tax from 18.46% to 12.17% (if the assessment is restricted to the company level). This effect is based on the significantly higher partial exemptions for the business assets of a GmbH. Insofar as this difference overcompensates for the structural costs of the GmbH, the loss of the flat-rate savers’ allowance at the company level as well as the high tax charge for a distribution in private assets then using such a structure will serve to maximise overall final net assets. This advantage would be even more likely, the higher the amount of assets and the higher the trading frequency.

In private assets, an equity ETF when compared with an identical basket of (individual) shares would generally be tax privileged (18.46% instead of 26.38%). By contrast, when an asset management GmbH is used for direct investments in shares, the tax charge of 1.54% would be very much more advantageous than for ETFs (12.17% > 1.54%). It should however be noted that this difference will, in turn, be reduced the higher the dividend is as a share of the overall yield.

Recommendation: For a comprehensive assessment of an asset management GmbH a case-by-case review would have to be carried out (e.g. by drawing up a complete financial plan) whereby the distributions by the asset management GmbH would have to be included at the private level.

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