Trading in shares and financial instruments is becoming increasingly popular with private investors. Many traders are currently considering organising their trading activities via a trading GmbH set up for this purpose. The reason for this is that the legislator has put a stop to many trading strategies by tightening the tax offsetting of forward transaction losses (to a maximum of EUR 20 thousand p.a.; see Section 20 para. 6 sentence EStG as amended by the JStG 2020) (see the regulation TXGT blog from 29 January 2020). If the transactions are carried out by a Trading GmbH, this restriction on offsetting losses does not apply.

In addition, many investors are counting on being able to benefit from a tax-favourable opportunity to retain and reinvest realised gains on the sale of shares by using the 95% tax exemption for share disposal transactions in accordance with Section 8b (2) KStG at GmbH level.

What should we make of such considerations, which are associated with one-off and ongoing costs?

Trading GmbH - doubling of the total tax burden in the event of a profit

It is often neglected that the tax efficiency of an investment structure may not only depend on loss offsetting considerations, but in particular also on the overall tax burden in the event of a profit (which is certainly the goal of every trader). It should be noted here that profits of the trading GmbH are generally subject to corporation tax (plus solidarity surcharge) and a trade tax burden at GmbH level of approx. 30% (depending on the assessment rate of the municipality). The remaining net profit is then subject to withholding tax of 26.375% at investor level upon distribution. The total tax burden on profits at trader level therefore amounts to approx. 48.5%which is almost double that of the exclusive flat-rate withholding tax on trading profits in private assets. Neglecting the taxation of distributions ignores the fact that the mere realisation of trading profits is not an end in itself, but ultimately serves to finance consumer spending at a private level, so that a distribution of profits in the total period must be included in the tax calculation.

Spardosen GmbH - no tax exemption for forward transaction profits and dividends

It is also often misunderstood that the 95% tax exemption for gains from the sale of shares only applies to physical share transactions. Gains from futures, CFDs, options and other derivatives are fully taxable at GmbH level, even if the underlying is a share or share index. In addition, dividends are fully taxable (i.e. at approx. 30%) at the GmbH level. Even if the GmbH could only benefit from the 95% tax exemption for privileged share disposal gains (i.e. would only realise physical share trading gains), the tax burden at GmbH level would amount to 1.5% (5% v. 30%) and, in addition, the final withholding tax of 26.375% would be added upon distribution to the trader. The question therefore arises as to why the profits are not immediately realised as private assets with final taxation of 26.375%?

Do not neglect exit taxation

Traders who are thinking of enjoying their hard-earned trading profits in warmer climes at a later date must also bear in mind that the assets accumulated in the GmbH may be subject to German exit taxation (Section 6 AStG) even without distribution. This means that even the relocation of residence cannot avoid final taxation at shareholder level.

Conclusion

In practice, it is regularly shown on the basis of multi-period financial mathematical planning calculations that a tax deferral advantage that justifies the additional administrative costs of a trading or savings can GmbH results at best for GmbHs that primarily realise physical gains on the sale of shares with long retention phases and high investment volumes. In many cases, it is therefore advisable to retain trading in private assets and to consider adjusting the trading strategy and/or trading instruments in order to avoid the loss set-off restriction.

Yours TAXGATE Team will be happy to provide you with further information.

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