GmbH in Germany or foreign holding company? Decision support for startups in 2025

Many German founders with global ambitions ask themselves whether they should set up their startup as a German GmbH or establish a foreign holding company – such as a US-Inc. in Delaware or a holding company in a Baltic state – should be used. In recent years, there have been significant reforms in Germany to make the location more attractive for start-ups and investors. Nevertheless, seemingly uncomplicated start-up processes and tax advantages are tempting abroad. This article takes a factual look at the legal and tax aspects of both paths. The opportunities and risks are presented in a sober tone – in particular the often underestimated pitfalls of foreign structures. It concludes with practical tips on structuring, for example for a later “flip” into an Inc. or the sensible use of a foreign holding company with a German operating company.

Innovations in Germany: Reforms strengthen the startup location

On January 1, 2024, Germany implemented a reform package with the Future Financing Act (ZuFinG) to facilitate financing and employee participation for start-ups. Important changes include:

• Employee stock ownership plans (ESOP): The annual tax-free amount for employee shares has been increased from € 1,440 to € 2,000. In addition, taxes on the benefit from employee shares can now be deferred for up to 15 years (previously 12 years). This is intended to alleviate the dry-income problem, where employees had to pay tax on virtual shares before they generated liquidity from them. Although these measures fall short of the demands of the start-up sector, they are a step in the right direction.
• Capital measures and stock market access: Capital increases have been simplified – e.g. a capital increase without subscription rights may now amount to 20% instead of 10% of the capital, which enables faster financing rounds (relevant for founders who want to raise new equity at an early stage). In addition, IPOs have been made easier for young companies, among other things by lowering the minimum liquidity requirement and dispensing with the need for a bank as co-applicant.
• Multiple voting shares: For the first time in decades, shares with multiple voting rights are once again permitted in Germany. A company can now issue voting shares up to a maximum of 10:1. This allows founders to maintain their influence despite raising capital – similar to dual-class shares in the USA. However, these multiple voting rights are only relevant for listed stock corporations and are limited in time (limited by law to 10 years after the IPO). They do not play a role for limited liability companies, as flexible voting rights arrangements were already possible in the past.
• Digitalization: Although it is not yet possible to transfer shares completely without a notary, something is happening: for example, the electronic share (e-share) has been introduced. There has also been progress in the formation of limited liability companies (online formation via video notary for simple standard cases). Nevertheless, the German bureaucracy is still noticeable: many processes still require notarizations and forms in German – which internationally operating founders often see as an obstacle.

In summary, the legal environment in Germany is improving: employee shareholdings will be tax-privileged, founders will be able to retain control in future with multi-voting shares and capital measures will become more startup-friendly. The goal is clear: Germany should become a more attractive location for investors.

Disadvantages of the German GmbH: taxes and bureaucracy

Despite the reforms, founding a company in Germany still has some disadvantages that founders should take into account when making their decision:

• High tax burden on profits: In Germany, a GmbH pays around 30% corporation tax and trade tax on its taxable income. The corporation tax rate is 15% (plus solidarity surcharge), plus around 14% trade tax depending on the municipality. This puts Germany at the upper end of the international scale. Although this burden is often not initially significant during the growth phase due to reinvested profits or losses, it reduces the funds that can remain in the company once profitability is reached. Profit distributions to the founders are also taxed again (capital gains tax approx. 25%).
• Complex formation and administrative procedures: The formation of a GmbH requires a notary appointment, share capital of at least €25,000 (of which €12,500 must be paid in) and entry in the commercial register. This process can take weeks or even months. For example, a fully digital foundation is not (yet) possible – in contrast to some foreign solutions. Even after incorporation, the bureaucracy remains demanding: every change in the group of shareholders or capital requires notarization, annual financial statements must be prepared in accordance with the German Commercial Code and published in the Federal Gazette, and communication with authorities (commercial register, tax office, Chamber of Industry and Commerce, etc.) is primarily in German and often paper-based. This effort costs time and money, which can be a burden for an agile startup.
• Rigid company law of the GmbH: Compared to Anglo-American legal forms, the GmbH is less flexible. For example, there are no freely tradable shares (every share purchase requires a notarized assignment), no different share classes with special rights (a GmbH does have some preferential shares, but the structuring options are limited) and traditional pre-emptive rights of shareholders, which can be a hindrance when investors come on board quickly. In practice, start-ups make do with individual shareholder agreements and concepts such as VSOPs (virtual stock options) for employees in order to circumvent the limitations – but all of this increases complexity.

In short: Germany offers legal certainty and now better framework conditions, but requires a high compliance effort in return. The tax rates are high and the processes are formal. Many founders see this as a competitive disadvantage compared to locations with leaner administration. The idea of circumventing these hurdles through a foreign holding company is therefore being considered.

Delaware C-Corp: US holding company as a magnet for capital

The Delaware Corporation (C-Corp) is considered the gold standard in the tech and VC sector. Especially if a startup wants to enter the US market in the foreseeable future or wants to approach US investors, the advice is often: “Found an Inc. in Delaware!”. What are the advantages of this approach?

• Quick and easy formation: A Delaware Inc. can be formed online within hours – without a notary and without high share capital requirements. The incorporation process is streamlined and inexpensive: Specialized agents and lawyers on site handle the formalities efficiently, sometimes even around the clock. “Incorporation in Delaware within 1 hour? No problem!” is a common saying for a reason. The costs are limited to a few hundred dollars in fees – in marked contrast to the months-long process of setting up a German GmbH.
• Investor-friendly law: Delaware offers very liberal corporate law with a great deal of contractual freedom. Several classes of shares, options and employee participation can be structured without any problems. In addition, there is extensive case law (precedents) and a specialized court (Court of Chancery) – investors appreciate the legal certainty and predictability in the event of disputes. The vast majority of US venture capital agreements are tailored to Delaware law; an Inc. therefore guarantees compatible standards. Subsequent IPO plans are also easier to realize with a US corp, especially since stock exchanges such as NASDAQ are accustomed to Delaware registration.
• No local US taxation (unless a US business): Delaware does not impose a federal income tax on profits of companies operating outside Delaware. Combined with the relatively moderate US federal corporate income tax rate of 21%, this results in a more favorable tax level than in Germany in some cases. However, this advantage only applies as long as the Inc. does not actually have a tax nexus in another US state. If the startup has offices or sales in California, for example, the corresponding state taxes are incurred there – the Delaware advantage is quickly put into perspective. Nevertheless, for a pure holding company without US turnover, Delaware remains at least neutral from a tax perspective. Profits from the German subsidiary would usually only be taxed at the level of the US holding company when distributed to the founders (although the exact consequences of international profit transfers are complex and depend on DTA regulations).

These advantages sound tempting – but there are also tangible disadvantages and obligations with a Delaware holding company:

• Double the administrative burden: A Delaware Inc. is subject to US law and requires a registered agent in Delaware, for example. If the business activity takes place outside the USA (e.g. in Germany), the US company often has to be registered as a “foreign entity” in this country – with additional fees and regulations. In practice, it usually comes down to setting up a German subsidiary GmbH to manage the operational business, while the Inc. acts as a holding company. This means you have two companies to administer: Annual financial statements according to two legal systems, two accounting systems, two sets of legal regulations. For example, the Inc. has to pay annual franchise tax in Delaware (often around USD 300, or more if the share volume is high) and file tax returns in the USA depending on its activities. This overhead is not trivial for a young startup.
• Tax pitfalls (management and relocation): Even if Delaware itself does not levy a profit tax rate, German tax may still apply. The decisive factor is the location of the management: If the founders and management are based in Germany and make all strategic decisions from here, the tax office may consider the Inc. to be taxable in Germany (despite registration in the USA). Then you would have the expense of an Inc. but would still be taxed as a German company – a worst-case scenario. To avoid this, the Inc. must have real substance in the USA: e.g. a resident director, board meetings in the States, office address, local activities. Such substance requirements cause costs and organizational effort. Furthermore, a subsequent departure of the founders must be taken into account: If a shareholder with ≥1% shareholding moves away from Germany or contributes the German GmbH to the Inc. there is a risk of exit taxation. In such cases, Germany simulates a sale of the shares and taxes the increase in value of the GmbH shares at the time of departure. Although there are options for deferral or repayment when moving to an EU country, these rules were tightened in 2022 (return must now generally take place within 7 years, previously 5 years, for the tax to be waived). A flip to a US inc. (outside the EU) usually triggers exit tax immediately – unless you structure very early and with expert advice to achieve tax neutrality. The tax details are complex and almost impossible to understand on your own.
• Legal risks and other disadvantages: The US holding company also exposes you to the US legal system. Theoretically, legal disputes can be brought against the holding company in the USA – an environment with high litigation costs and class actions that could otherwise be avoided without a US business. In addition, a Delaware Inc. is subject to US securities law (SEC regulations) for corporate actions, which can be a hindrance for international crowdfunding or a listing in Europe, for example. Finally, it should not be overlooked that Delaware is not an automatic source of financing: Not every VC invests “blindly” just because the construct is called Delaware. Without a substantial US business or investor, a foreign shell can even make people suspicious. Founders should therefore be able to justify the step strategically.

Interim conclusion: A Delaware corp can be the ticket to global capital and markets – but it comes with more obligations and risks than some people realize. Especially without an immediate US plan, you should check carefully whether the benefits outweigh the additional burden. It is often recommended that a Delaware flip should only be carried out when specific US investors or transactions are imminent. Experts also advise this: A Delaware flip is a significant undertaking that should be considered early on, but should not be rushed into for the sake of mere prestige.

Holding in Estonia & Co.: Digital efficiency and tax deferral

In addition to the USA, German founders sometimes look to foreign EU solutions, for example Estonia or Latvia. These countries advertise digital administration and tax incentives. What is this all about?

• Digital founding and management: Estonia is famous for its e-residency initiative. Anyone (including non-residents) can set up an Estonian OÜ (similar to a limited liability company) online – 100% digitally in often less than an hour. There is no need for notaries or visits to the authorities. Administrative activities such as commercial register notifications, tax returns, etc. are carried out electronically with a digital signature card. This is extremely attractive for startup founders who experience Germany as bureaucratic. In fact, start-up costs and time in Estonia can be a fraction of those in Germany. Latvia and Lithuania have also digitized processes in recent years, although Estonia remains a pioneer here. Communication with authorities is in English (common in Estonia), which suits internationally oriented teams.
• Tax advantages: Estonia’s greatest asset is its unique corporate tax system: company profits are only taxed when they are distributed. As long as profits remain in the company (are retained), no corporation tax is payable. When distributed to shareholders, Estonian corporation tax is generally 20% of the gross amount of the dividend. For regular profit distributions, this rate may be reduced to an effective 14%, in which case an additional 7% dividend tax may be levied on the recipient. In simple terms: reinvested profits remain tax-free, which is intended to facilitate rapid growth. This makes Estonia fundamentally different from Germany, where every annual profit is taxed – whether reinvested or not.
• EU legal framework and subsidies: As an EU country, Estonia offers a secure legal framework and double taxation agreements, similar to Germany. There are some favorable regulations for startups, such as for the immigration of foreign specialists (startup visa) and a positive climate for tech companies. Latvia also attracts companies with a holding structure: a holding company there can receive foreign dividends tax-free and realize resale profits tax-free – similar to the German holding privilege, but with simplified administration. In Lithuania, there has been a kind of sandbox for start-ups with tax relief since 2023. Compared to offshore destinations, the advantage within the Baltic States is that EU directives (e.g. on tax-neutral restructuring or the Parent-Subsidiary Directive) apply. Under certain circumstances, shares in a German GmbH can be transferred tax-free to an EU holding company (share-for-share exchange within the EU) – a procedure that would not be possible with a US company.

However, foreign holdings in Estonia & Co. are not a miracle cure without downsides. Particular attention should be paid to

• German taxation and substance: As with the US-Inc., an EU holding company can also quickly be considered taxable in Germany if the actual management takes place here. A letterbox OÜ without its own office or staff in the Baltic States, while all decisions are made in Berlin, is likely to be treated as a sham outsourcing from the point of view of the tax authorities. The profits of the OÜ would then be fully taxed in Germany – Estonia’s tax advantage would be lost. It is therefore necessary to build up at least minimal substance abroad: e.g. an Estonian director or real administrative headquarters on site, regular board meetings in Tallinn, etc.. Founders often underestimate this effort and risk add-back taxation under the German Foreign Tax Act if the foreign company has mainly passive income. Although active operating activities in the EU are usually exempt from add-back, the line is blurred. In short, you can’t do it without planning and proof, otherwise the tax trap is open.
• Costs and compliance: Although a Baltic holding company is cheaper to set up, it also incurs ongoing costs: you need a local accounting service, annual financial statements in accordance with local law, and often the services of a service provider for e-residency administration. You also need to be familiar with the legislation in two countries. The tax savings (through retention) must first outweigh these additional costs. In the early phase of a start-up, profits are rarely generated anyway – the tax advantage therefore often only takes effect late, while the administrative duplication of structures immediately generates costs.
• Relocation and emigration aspects: If you use a foreign holding company at an early stage to avoid exit taxation at a later date, you should be aware of this: Germany takes action if a shareholder previously resident here moves abroad (even within the EU). Although the extended return rule (now 7 years) offers a certain deferral, it is important to keep an eye on this deadline. For example, anyone moving their residence to Estonia in order to save tax there should not simply assume that they will no longer be liable to pay tax in Germany – careful advice is required when structuring this. It should also be borne in mind that dividends from Estonia are generally subject to the local final withholding tax (25% plus solidarity surcharge/company tax) for the German recipient, unless special structures apply. The hoped-for tax exemption can therefore turn into a tax deferral, which is made up for when the money is “exited” (withdrawn).

The bottom line is that Baltic structures can be interesting for founders looking for a European holding solution: You stay within EU law, but use more modern administration and the “tax only on exit” principle . But here, too, there is a risk of unpleasant surprises without sufficient substance and advice. The authorities – especially after the revelations about aggressive tax schemes by large corporations – are taking a close look. Estonia itself is tightening some rules from 2024 (e.g. VAT will be increased), which shows that even there the times of paradisiacal conditions will not remain static forever.

Beware of the lure of “abroad”: risks and obligations

Many founders hear from others or read in blogs that they can “leave German bureaucracy and taxes behind” by setting up a foreign holding company . This prospect is tempting – but the reality is more complex. Here are a few cautionary points to set the scene:

• Additional costs and complexity: Operating two companies in different countries means double fixed costs (tax consultants, annual financial statements, reporting obligations) and legal complexity. Contracts between the holding company and the German subsidiary (e.g. management fees, IP licenses) must be structured at arm’s length, otherwise there is a risk of accusations of hidden profit distributions. Transactions must also be carefully documented in order to comply with both legal systems. This can quickly become overwhelming for a young start-up without an experienced finance team.
• Legal advice is indispensable: The design of an international structure requires specialized lawyers and tax advisors. Questions of applicable law, double-entry bookkeeping, compliance (know-your-customer, FATCA/CRS reporting) and the status of tax bodies are unknown to laypersons. Without sound advice, you run the risk of missing out on essential obligations – which, in the worst case, can result in fines or additional payments. Founders should honestly factor in these consulting and administrative costs from the outset, instead of ignoring them in their zeal.
• Tax retention periods: If you are thinking of “flipping” your company set up in Germany abroad at a later date, you need to consider the timing and deadlines. For example, German exit taxation only applies if you have been subject to unlimited tax liability here for at least 7 of the last 12 years. A founder who has only lived in Germany for a short time could theoretically move away without having to pay exit tax – but most local founders meet the 7-year requirement. You should also be aware of the lock-up period for tax-neutral EU conversions (often 3-5 years of non-sale after the transaction) if you are relying on such regulations.
• Substance and reporting obligations: Already mentioned, but essential: a foreign holding company needs real local life in order to be recognized. This may mean traveling for board meetings, local contracts and a share of the management abroad. There are also notification obligations in accordance with Section 138 AO: The formation of foreign companies by residents must be reported to the tax office. And the Foreign Tax Act imposes strict duties of cooperation in certain constellations (e.g. interposition of low-taxed foreign companies). A popular structure such as the Malta Limited with an interim managing director has often failed precisely because of these hurdles.

In short, setting up abroad is not a shortcut to avoiding obligations. It often only shifts or doubles them. In recent years, the German authorities have kept a watchful eye on such constructs and, in case of doubt, demand proof that a legitimate foreign situation exists. For founders, this means: only go abroad with a clear strategy and understanding – and don’t blindly follow the call of the tax haven.

Investor perspective 2025: Do VCs still demand foreign structures?

An important factor in the choice of legal form is the expectations of investors. In the 2010s, it was considered almost necessary to set up a US holding company for the largest financing round at the latest, as international venture capitalists were reluctant to invest in German GmbHs. But what will the situation be like in 2025 – will German VCs still require foreign structures?

The trend appears to be changing slightly. The new German rules (e.g. ESOP relief and multi-voting shares) are improving the local environment. Investors recognize that German startups can now compensate for at least some of the previous disadvantages. For example, employee participation was a sticking point: international investors favor models in which employees are incentivized – here the ZuFinG creates confidence that real equity plans will also become more feasible in Germany. The possibility of later introducing dual-class shares for an IPO also removes an argument in favor of the US structure, as founders could now also retain control of a company listed on a German stock exchange.

However, a lot depends on the individual focus of the start-up. If it is foreseeable that you want to enter US programs such as Y Combinator or that the main market will be the USA, investors continue to recommend it, set up a Delaware Inc. early . Such programs often make this a condition. Similarly, if an American lead investor joins, it almost always comes down to an Inc. structure so that the financing can be structured in accordance with US law. In these cases, VCs actively demand the flip – on the grounds of “market proximity” and standardization.

For primarily European financing rounds, however, German or European holding structures are now more accepted. Some German VCs emphasize that they are no longer bothered by the GmbH as long as the governance and contract design are professional. There are now more success stories of start-ups that have grown as German GmbHs and have even been sold at high valuations or gone public. This puts blanket demands for Delaware into perspective. In addition, too early a foreign structure can also act as a deterrent if it appears unnecessarily complicated or the startup faces tax uncertainties in its home market as a result.

Conclusion from an investor’s perspective: The new German rules are still in their infancy – many VCs are initially observing whether they are really taking effect. A complete rethink will take time. There is unlikely to be a uniform picture by 2025: Some investors will continue to rely on the tried and tested (Delaware for global plays), others will trust in the “new” location of Germany and will not demand a change until there is a concrete reason to do so. Founders should therefore seek discussions with their potential investors at an early stage. It is important to convincingly explain why the chosen structure makes sense – whether you need the flexibility of an Inc. or deliberately want to take advantage of the benefits of a GmbH. Ultimately, VCs invest in the team and the business idea; the legal form is a means to an end.

Conclusion: Individual consideration and design tips

There is no one-size-fits-all solution. Whether founding in Germany as a GmbH or via a foreign holding company is the better option depends on the start-up’s goals and circumstances. Founders should ask the following sober questions: Where are my main markets and investors in the first few years? How important are fast start-up and simple processes vs. local proximity and support? Am I prepared to take on the additional expense of a dual structure – and do I have the right advisors at hand?

In many cases, it is advisable to initially opt for a German GmbH, especially if the startup is launching in Germany/EU and is seeking initial financing here. The GmbH offers stability and avoids unnecessary complexity at the beginning. Thanks to the reforms (e.g. tax-privileged ESOPs and multi-voting shares that can be introduced later), it is now possible to do some things that were previously only possible abroad. Should it become apparent in the course of development that a US structure is advantageous or necessary for further growth, a planned flip can still be carried out. Tip: Agree in the shareholders’ agreement of the GmbH that all shareholders will agree to a subsequent change of legal form or share swap into a foreign holding company if strategically necessary. This will help you avoid blockades when things get serious.

On the other hand, there are legitimate situations in which a foreign holding company makes sense from the outset – for example, if it is clear that the product is globally oriented and should attract international venture capital early on. In such cases, a holding company abroad with an operating German subsidiary can be a good compromise. The operating GmbH ensures that you are able to do business in Germany (hire employees, use funding, generate sales), while the holding company provides the desired flexibility for capital measures and the investor structure abroad. It is essential to obtain tax and legal advice in both countries in order to properly set up profit transfer channels, IP licensing and investment programs, for example. Tip: If you know early on that you want to use a foreign holding company, structure it so that IP rights and shareholdings are held by the holding company and the German GmbH acts as a wholly-owned subsidiary. In this way, investors or employee shareholdings can be implemented at holding company level, while “only” day-to-day operations take place in Germany. It is also important to establish clearly documented management regulations – who makes decisions, where meetings take place – in order to be able to provide evidence of the foreign management.

Finally, a word about the exit strategy: There are many ways to success, whether as a German GmbH or as a Delaware Inc. It is crucial that contracts and structures are designed to be exit-ready at an early stage. For example, an investor term sheet for a GmbH should already be formulated in such a way that it can be easily transferred to the Inc. in the event of a Delaware flip (keyword: “flip clause”). It is also worthwhile to initially grant virtual options to employees, which can later be converted into real shares in the potential holding company – this avoids tax disadvantages due to a change of country. In the purchase or participation agreement with investors, it can be stipulated which structure variant is aimed for in the exit (e.g. share deal at holding level) so that everyone works towards this.

Conclusion: The German improvements of 2024 make the formation of a GmbH more attractive than before, but the decision depends on your vision. Both – the down-to-earth GmbH and the cosmopolitan foreign holding company – may be the right way to go in 2025. Make the choice with a cool head, seek advice and plan for the future: Be it the option of a later flip into an Inc. or setting up a holding structure from the outset with well thought-out contractual arrangements. This way, you are well equipped to build up your start-up in a legally sound and scalable way – in Germany and beyond.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.