Tax & Legal

Tax & Legal

Review of profit and loss pooling agreements concluded prior to 27 February 2013 recommended

An amendment to a statutory law which was passed by the Bundestag and Bundesrat in December 2020, entered into force on 1 January 2021, requires a review of those profit and loss pooling agreements concluded and last amended before 27 February 2013. This pertains to profit and loss pooling agreements (PLPA) for tax groups (“Organschaft”) with a GmbH as controlled subsidiary and which do not (yet) contain an explicit and unconditional reference to Section 302 of the German Stock Corporation Act (GSCA) which includes future changes of the provision (so-called “dynamic reference”).
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Finance Act 2018

On 8 November 2018, the Finance Bill 2018 was adopted by the German parliament and received the consent of the Bundesrat on 23 November 2018 in the form of “The Act for the Avoidance of VAT Losses on the Trading of Goods on the Internet and Amendments to other Tax Regulations”(hereafter “Finance Act 2018”). This article sets out a selection of the new regulations. Continue reading

Tax Consolidation Groups (“Organschaft”) for income tax purposes: Compensation payments to minority shareholders; failure to amend to “old agreements” of a GmbH following Section 302 (4) Stock Corporation Act.

According to a decision of the Supreme Tax Court published on 9 November 2017 a profit pooling agreement will not be recognised for tax purposes where the compensation agreement with the external shareholder contains both the right to a variable compensation payment calculated on the basis of the profits of the subsidiary/controlled company/”Organgesellschaft” (“subsidiary”) and a fixed amount. This also applies to subsidiaries in the form of a GmbH (i.e. limited companies as well as to public limited/stock companies (AGs)). The Supreme Tax Court also ruled that the requirement of Section 17 2nd Sentence No. 2 Corporation Tax Act (old version), according to which the assumption of losses was to be expressly agreed in the profit pooling agreement of a GmbH in accordance with Section 302 (4) Stock Corporation Act, was not only to be complied with at the time of conclusion of the agreement but also in each of the following years. It followed that those parts of the Section 302 regulation which had not entered into force at the time of the conclusion of the contract were also to be taken into consideration. Thus where a loss assumption agreement is not inserted into an “old” profit pooling agreement, (i.e. one concluded prior to the entry into force of Section 302 (4) Stock Corporation Act), in order to meet the requirements of the amended section and where this omission was not subsequently redressed under the amnesty rule, the Organschaft was no longer to be recognised for income tax purposes. Continue reading

Organschaft parent need not be active business until subsidiary’s first year end

The Supreme Tax Court has held that an Organschaft parent must be an active business by the effective date of the first profit surrender, i.e. the first year end of the subsidiary. It also held that the provision allowing profit pooling agreements with formally inadequate loss subvention provisions to be corrected by December 31, 2014 applies to all agreements existing on February 26, 2013 regardless of the nature of the inadequacy.

The Organschaft provisions in the Corporation Tax Act require that the parent hold a majority of the voting rights throughout the term of the Organschaft. They also require that the parent be an active business entity. A tax office rejected an Organschaft profit surrender on the grounds that the parent had acquired its subsidiary whilst it was still an asset managing entity and had not begun its own business activities until the following year. Accordingly, it had not been an active business at the beginning of that year and thus could not qualify as the Organschaft parent until a year later.

The Supreme Tax Court has now held against the tax office.  The letter of the statute does not specify a time and thus does not insist on continuity of activity throughout the period. It is therefore sufficient that the parent be a business entity when the profit surrender takes effect. This is the balance sheet date of the subsidiary. This conclusion satisfied the intention of the statute of ensuring that trading income remains taxable as trading income after surrender to an unincorporated parent.

An act entering into force on February 26, 2013 required a specific form of wording for the loss subvention provision of an Organschaft profit pooling agreement. Agreements then existing but not conforming to the requirement were given until the close of business on December 31, 2014 for amendment. The main condition is that of actual subvention of any loss incurred at any time prior to the amendment of the agreement.

The Supreme Tax Court has now held that the fact of loss surrender is irrelevant if no loss was incurred. It also held that the changeover provision applied to any defective loss subvention provision. This included instances of agreements with no loss subvention at all. Finally, it made the point that there was no need for any amendment to an agreement that loses its effect before January 1, 2015.

Supreme Tax Court judgment I R 40/12 of July 24, 2013, published on September 11