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Consolidated tax groups – Are there additional/ lower profit transfers that are generated apart from tax consolidation

The consolidated tax group for profit tax purposes is frequently characterised as the essence of group tax law. While the tax advantages are indeed substantial, nevertheless, they need to be carefully considered.

These advantages include:

  • offsetting losses from subsidiary corporations against the profits of the parent company or other corporations in the consolidated tax group;
  • avoiding the notional non-deductible business expenses in the amount of 5% of the profit distribution;
  • no capital gains tax on profit transfers.

However, there are unfortunately a lot of requirements that have to be met by those taxpayers who wish to make use of the consolidated tax group option. Even once the high formal hurdles have been cleared, the implementation in terms of accounting and tax returns is difficult. In doing so, so-called additional/lower profit transfers generated prior to tax consolidation as well as in the course of tax consolidation constitute a known minefield. These arise when there are differences between the financial statements and the tax accounts. Furthermore, the German fiscal authority also constructs additional/lower profit transfers generated apart from the tax consolidation, which to some extent has been vehemently rejected in the literature.

In a case that recently came before the Rhineland-Palatinate tax court, the judges rejected the view of the fiscal authority, at least with respect to one point – in the case in question, two subsidiaries, which were not included in the consolidated tax group, were merged into their parent company (upstream merger). Although, the acquiring corporation was a subsidiary (for group tax consolidation/relief purposes) of the claimant. The subsidiaries had correctly been reported at fair market values as applicable under German commercial law and at book values as applicable for tax purposes. This resulted in an additional profit transfer. The parties concerned were able to agree on this point, however, there was a dispute about the issue of whether the reason for this additional profit transfer had arisen during the tax consolidation period (according to the claimant) or prior to that period (according to the tax office).

The legal consequences are entirely different because, under the law, only in cases where the reason for the transfer arose prior to tax consolidation would a profit distribution be deemed to have occurred. This would have led to a profit of around € 600,000 for the claimant.

The judges were however of the same opinion as the claimant and, in this case, basically rejected the notion that the reason had arisen during a period apart from or prior to the tax consolidation. The wording of the law should not lead to the conclusion that the criterion “during the period prior to tax consolidation“ allows any more than an interpretation purely in terms of time.

Please note: The tax office has lodged an appeal against the tax court ruling from 10.9.2019 (case reference: 1 K 1418/18) with the Federal Fiscal Court; the case is pending there under case reference I R 51/19.

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