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Actual implementation of a profit transfer agreement in a consolidated tax group

According to settled case law, a profit transfer agreement (PTA) would only have actually been implemented if the profit that has been determined is transferred within a reasonable period of time. The Cologne tax court dealt with the issue of whether or not these preconditions would be met if no payment occurs but, instead, there is only offsetting.

In the case in question, where the Cologne tax court made a decision, in its ruling of 21.6.2022 (case reference: 10 K 1406/18), a subsidiary company (SC) posted the profit that had to be transferred and the interest that had to be paid to the ‘liabilities owed to the shareholders’ account. However, in the relevant years, no counter claims or compensatory payments were posted. The parent company (PC) did not post an offsetting claim either. It was only some years later that an offset occurred against a private liability of the PC sole trader. As no PTA was actually implemented, as required by law, the tax audit did not recognise the consolidated tax group. Posting to a current offset account is indeed generally allowed, however, this would only result in the fulfilment of the PTA if counter claims were normally recorded there or if, at least, lump sum payments were made in order to balance the offset account. 

The taxpayer objected to this argument by pointing out that the ‘liabilities owed to the shareholders’ account constitutes such an offset account. Consequently, the profit transfer obligation in the PTA was actually implemented with the postings made to this account. Moreover, the taxpayer was of the view that it was sufficient for the profit transfer obligation to be fulfilled only once the PTA had been terminated. As a last point, the taxpayer explained his actions by saying that entering the items in the offset account was the equivalent of an immediate novation, which is why a previous entry as a claim or liability from the PTA and a subsequent reclassification into an offset account was not necessary. 

Outcome: However, the Cologne tax court adopted the view of the fiscal administration. Posting to the ‘liabilities owed to the shareholders’ account was not sufficient. In particular, the offsetting several years later did not occur in a timely manner and, in the case in question, because the offset was against the private debt of the PC sole trader it was not offset against the PC. 

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