Germany’s Federal Fiscal Court issued a decision on 11 July 2023 in four combined cases involving the financial integration requirement under the domestic corporate tax group rules. At issue specifically was the consequences where the controlling company is merged into another entity at some point during the year.
Various requirements must be met to establish a corporate tax group (Organschaft) in Germany. One of these requirements is that there must be “financial integration,” i.e., the controlling company must hold an uninterrupted interest in the controlled company from the beginning of its financial year to such an extent that it is entitled to the majority of the voting rights from the shares in the controlled company.
One of the cases before the court involved a corporate tax group where A-GmbH was the controlled company and B-GmbH was the controlling company. A third party, X-OHG, acquired all of the shares of B-GmbH in March 2015 and B-GmbH was merged into X-OHG in November with retroactive effect from 1 April 2015. In its 2015 tax returns, A-GmbH, whose financial year began on 1 January 2015, assumed a continued tax group relationship with X-OHG and declared income of EUR 0. The tax office rejected this position based on a November 2011 circular published by the tax authorities.
Based on a special fiction in the German Reorganisation Tax Act (RTA), the financial integration of the controlled company into the controlling company existed for the entire year in 2015. Rather than look at the date of the merger, the RTA provides for the acquiring legal entity (X-OHG) to assume the legal status of the merged legal entity (B-GmbH) under the “footstep theory.” This also includes the financial integration of the controlled company (A-GmbH) with the controlling company (B-GmbH) as a prerequisite for a corporate tax group. The court held that the fact that the merger date (1 April 2015) is not identical to the financial year start date of the controlled company (1 January 2015) is not detrimental to meeting the financial integration requirement (contrary to the opinion of the tax authorities in the 2011 circular). The acquiring legal entity steps into the same legal position as the merging legal entity with regard to financial integration even if the relevant date does not coincide with the start of the controlled company’s financial year.
It is therefore sufficient for the recognition of a corporate tax group if, from the beginning of the financial year of the controlled company, there is financial integration first with the transferring legal entity and then with the acquiring legal entity.
The German tax authorities are in the process of revising the 2011 reorganisation circular. It remains to be seen whether they will take court decisions on tax group cases into account and adapt the circular to the current jurisprudence in this area.
Roland Speidel
BDO in Germany
Various requirements must be met to establish a corporate tax group (Organschaft) in Germany. One of these requirements is that there must be “financial integration,” i.e., the controlling company must hold an uninterrupted interest in the controlled company from the beginning of its financial year to such an extent that it is entitled to the majority of the voting rights from the shares in the controlled company.
One of the cases before the court involved a corporate tax group where A-GmbH was the controlled company and B-GmbH was the controlling company. A third party, X-OHG, acquired all of the shares of B-GmbH in March 2015 and B-GmbH was merged into X-OHG in November with retroactive effect from 1 April 2015. In its 2015 tax returns, A-GmbH, whose financial year began on 1 January 2015, assumed a continued tax group relationship with X-OHG and declared income of EUR 0. The tax office rejected this position based on a November 2011 circular published by the tax authorities.
Based on a special fiction in the German Reorganisation Tax Act (RTA), the financial integration of the controlled company into the controlling company existed for the entire year in 2015. Rather than look at the date of the merger, the RTA provides for the acquiring legal entity (X-OHG) to assume the legal status of the merged legal entity (B-GmbH) under the “footstep theory.” This also includes the financial integration of the controlled company (A-GmbH) with the controlling company (B-GmbH) as a prerequisite for a corporate tax group. The court held that the fact that the merger date (1 April 2015) is not identical to the financial year start date of the controlled company (1 January 2015) is not detrimental to meeting the financial integration requirement (contrary to the opinion of the tax authorities in the 2011 circular). The acquiring legal entity steps into the same legal position as the merging legal entity with regard to financial integration even if the relevant date does not coincide with the start of the controlled company’s financial year.
It is therefore sufficient for the recognition of a corporate tax group if, from the beginning of the financial year of the controlled company, there is financial integration first with the transferring legal entity and then with the acquiring legal entity.
The German tax authorities are in the process of revising the 2011 reorganisation circular. It remains to be seen whether they will take court decisions on tax group cases into account and adapt the circular to the current jurisprudence in this area.
Roland Speidel
BDO in Germany