§ 8b KStG: 95% tax-free —
the mechanics in detail.

§ 8b of the German Corporation Tax Act (KStG) is the single most important provision in German holding company taxation. Understand it, and you understand why holding structures are such a powerful tax instrument. Apply it carelessly, and you risk a back-tax assessment that can render the entire holding model uneconomical for years.

What the provision actually says

§ 8b KStG covers two areas: (1) dividends that one corporation receives from another corporation, and (2) gains from the sale of shares in corporations. Both are, as a rule, treated as tax-exempt. However — and this is the crucial twist — a flat 5% is treated as "non-deductible business expenses" and therefore remains taxable after all.

The result: 95% of participation income remains effectively tax-free. At a combined 30% burden of corporation tax and trade tax, that works out to an effective tax rate of 1.5% on dividends and capital gains.

The conditions for the tax exemption

For dividends (§ 8b para. 1 KStG)

• Minimum 10% shareholding at the start of the calendar year (the so-called portfolio threshold). Shareholdings below 10% are fully taxable.
• Corporation as both distributing entity and recipient (GmbH, AG, UG).
• No specific anti-abuse rules infringed (e.g. hybrid vehicles, treaty shopping).

For capital gains (§ 8b para. 2 KStG)

• Sale of shares in a corporation.
• No 10% minimum shareholding threshold (important: for capital gains, this requirement does not apply).
• The corollary: capital losses are equally non-deductible for tax purposes.

The key pitfalls

Portfolio holdings below 10%

A holding GmbH that holds less than 10% in another corporation loses the § 8b exemption on dividends entirely. If the holding actively manages a portfolio of shareholdings, you should verify that the 10% threshold is consistently maintained.

Losses are not deductible

If you sell a shareholding at a loss, that loss is not tax-deductible. If a subsidiary becomes insolvent, writing off the book value is therefore not a tax-effective expense. That is the flip side of the 95% exemption — it works symmetrically.

International shareholdings

For shareholdings in EU corporations, the Parent-Subsidiary Directive applies and reduces withholding tax to 0% (from a 10% shareholding). For shareholdings in third countries, the double taxation treaty (DBA) position must be analysed — depending on the country, withholding tax of 5–15% is typical.

CFC taxation under the AStG

For subsidiaries in low-tax jurisdictions (effective tax < 15%), §§ 7–13 AStG (German CFC rules) may apply: the income is then subjected to German taxation notwithstanding the § 8b exemption. The subsidiary's substance and active business operations are the decisive factors here.

Practical tips for holding structures

• Consolidate shareholdings within the holding, don't scatter them — this secures the 10% threshold and simplifies tax filings.
• Keep book values low: When setting up a holding via a contribution of shares, the book value should not be set unnecessarily high — the lower the book value, the larger the tax-exempt capital gain on a later sale.
• Respect the lock-up period: Where shares are contributed in exchange for new shares, a 7-year lock-up period applies under § 22 UmwStG. A sale during this period triggers retroactive taxation.
• Document substance: To apply § 8b in an international context, you must be able to demonstrate the holding's economic substance — business premises, management, independent decision-making.

Fatma Tabak

Tax advisor (Nordbaden Chamber of Tax Advisors) · Founder, TABAK Consulting

More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.

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