The formation of a German tax group requires that the parent company and group company conclude a profit and loss transfer agreement. The requirements for such an agreement to be recognised for German tax purposes have been changed several times over the last decade, in particular, the requirement that the parent company be held liable, under the agreement, for any losses of the group company where the group company is a German limited liability company (Gesellschaft mit beschränkter Haftung – GmbH). Section 17 of the German Corporate Income Tax Act (KStG) – in its latest version – requires for such tax groups , inter alia, the agreement includes a dynamic reference to the statutory rules governing the assumption of liability for losses where the group company is a German stock corporation (Aktiengesellschaft – AG), as set out in section 302 of the German Stock Corporation Act (AktG).
In 2004, section 302 AktG was amended with the introduction of a new paragraph 4, which imposed a 10-year time limit on claims relating to liability for losses. Since many profit and loss transfer agreements with GmbH group companies that were concluded before 2004 simply included the wording from the earlier version of section 302 AktG (i.e., without the new paragraph 4) or only referred to section 302, paragraphs 1-3 AktG, they did not contain the new language set out in section 302, paragraph 4 AktG and so did not comply with section 17 KStG (nor, indeed, did they comply with the earlier version of section 17 KStG).
In order to protect the tax status of existing German (GmbH) tax groups, the BMF did not challenge, in an earlier circular, the tax treatment of such non-compliant profit and loss transfer agreements provided they were concluded before 2004. By contrast, a recent judgment of the German Federal Tax Court (Bundesfinanzhof – BFH) of 10 May 2017 (file number I R 93/15) challenged this treatment by requiring that all profit and loss transfer agreements entered into by German GmbH tax groups include a dynamic reference to the provisions of section 302 AktG relating to the contractual assumption of loss.
As a consequence of that judgment, in its most recent circular mentioned above, the BMF requires that, unless they include such a reference, profit and loss transfer agreements involving German GmbH tax groups must be amended by no later than 31 December 2019 in order to be recognised for tax purposes. Otherwise, the beneficial tax treatment of the tax group may be denied both retroactively and in the future.
It is important to note that, in addition to the amendment of the profit and loss transfer agreement and approval of the shareholders’ meetings of the parent and group companies, the revised agreement must be registered with the German commercial register (Handelsregister) to become effective and, in accordance with the BMF circular, it is the date of such registration that must meet the above deadline. Therefore the amendment of the profit and loss transfer agreement must be filed with the registry duly before 31 December 2019 in order to be registered in time.
In accordance with the BMF circular, profit and loss transfer agreements that are due to terminate before 1 January 2020 must not be amended as set out above. The same applies to profit and loss transfer agreements where the group company is a German stock corporation.
Client Alert 2019-164
