German corporations such as the GmbH, AG or SE are generally subject to corporate income tax and trade tax on a stand-alone basis. Consolidated tax returns of affiliated group companies are not recognized under German Corporate Income Tax and Trade Tax Law.
However, the German rules governing tax groups (“Organschaft”) can provide a similar relief. Within such tax group, the taxable income (or loss) of one or more corporate subsidiaries is pooled (not consolidated) and taxed at the level of the tax group’s parent company together with its own taxable income or loss.
To qualify under the tax group regime, a number of conditions have to be met. The parent must hold the majority of voting rights in a subsidiary from the beginning of the subsidiary’s fiscal year. In addition, the parent and the subsidiary must conclude and execute a Profit and Loss Transfer Agreement (PLTA) for a minimum term of five calendar years. The statutory requirements are very specific and highly formalistic, which makes the German tax group regime formal and error-prone. One continuous source of error is the proper phrasing of the PLTA. In an attempt to mitigate undue consequences, the German legislator amended the governing statute in 2013. One key amendments relates to the mandatory terms and conditions of a PLTA. The wording of the previously enacted requirements had been controversial, and put recognition of a number of genuine tax group at a risk for mere technical reasons. The new statute stipulates that a dynamic reference to the loss absorption regulations set out in section 302 AktG in its relevant version as amended from time to time must be explicitly agreed upon. The new statute applies to PLTAs concluded or amended after the day the law was enacted. Technically, the statute aims at “grandfathering” previously compliant contracts. However, this is of limited practical value, as the uncertainties of the superseded rules in many cases do not allow qualifying an existing contract as “compliant” in the sense of the grandfathering rules. In order to obtain legal comfort, many contracts will have to be amended (including registering with the commercial register) prior to January 1, 2015.
We strongly recommend an immediate and detailed check of existing PLTA to ensure continued tax recognition beyond the transition period. In practice, such contract review often reveals further flaws within the wording which could be remedied in amending the terms and conditions of the PLTA.
By Jossip Hesse