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German Public Auditor, Certified Tax Advisor, Partner, Tax & Legal
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
In its decision of January 14, 2026 (case No. 6 K 2496/23 G, F) the Fiscal Court Münster ruled that, for the purposes of Section 4 (4a) of the German Income Tax Act (EStG), the profits of subsidiary partnerships are to be taken into account in determining excess withdrawals by the parent company only at the time of actual payment or actual loss offset. The same shall also apply to profits/losses of affiliated companies. It thereby reaffirms its previous case law (judgment of July 2, 2024, case no. 6 K 1425/21 F, appeal pending at German Federal Fiscal Court, case no. IV R 13/24) as well as the view of the tax administration in the German Federal Finance Ministry circular of November 2, 2018 (margin note 8, sentence 4).
Under Section 4 (4a) EStG, interest on debt is not deductible if excess withdrawals have been made. An excess withdrawal is the amount by which withdrawals exceed the sum of the profit and contributions for the fiscal year. The non-deductible interest on debt is calculated as 6 % of the excess withdrawals for the fiscal year, plus the excess withdrawals from previous fiscal years, minus the amounts by which profits and contributions exceeded withdrawals in previous fiscal years (under-withdrawals).
In this regard in the absence of a specific provision to the contrary, the definition of “profit” in Section 4 (4a) EStG (in principle) corresponds to the general definition of “profit” in Section 4 (1) EStG or Section 4 (3) EStG. Profit under Section 4 (1) EStG is the result of the (intra-balance-sheet) comparison of business assets (“tax balance sheet profit”). If the taxable corporation, in turn, holds an interest in a partnership, the profit from the subsidiary is directly allocated to this (parent) corporation on a pro rata basis and is included in the (tax balance sheet) result of the parent corporation.
However, regarding Section 4 (4a) EStG, this view conflicts with the business-oriented approach that must be adopted in light of the purpose of the law. For the purposes of Section 4 (4a) EStG, the sole determining factor is the withdrawal of capital from the relevant business entity. A cross-business analysis is not appropriate.
In this respect, this view now requires a restrictive interpretation in the case of a two-tier partnership: For the purposes of Section 4 (4a) EStG, the profits of the lower-tier companies are not to be taken into account in the year of their tax-related allocation, but only upon payment as a contribution to the upper-tier company. For the purposes of Section 4 (4a) EStG, the parent and subsidiary companies are separate entities, and cash flows must therefore be classified as contributions and withdrawals.
In its decision, the Tax Court assumes - in accordance with the principles developed for subsidiary partnerships - that, even in the case of a tax group, a business-based rather than a group-based approach is appropriate for the deduction of interest on debt, and that the profits and losses of the controlled entity must be taken into account at the time of the actual loss offset. The controlling entity and the controlled entity remain separate legal entities under civil and tax law and determine their respective income independently; only thereafter is the income of the controlled entity attributable to the controlling entity pursuant to Section 14 of the German Corporate Income Tax Act. It follows that both the controlling entity and the controlled entity are independent entities for the determination of profits and thus independent businesses within the meaning of Section 4 (4a) EStG. However, this does not mean that the profits and losses of controlled entities need not be taken into account at all by the controlling entity; rather, corresponding cash flows (in this case, profit transfers/loss offsets) must be treated as withdrawals or contributions.
Notice:
Given that an appeal has also been filed with the German Federal Fiscal Court against the recent decision of the Münster Fiscal Court (case no. IV R 3/26), taxpayers in similar situations - such as two-tier partnerships or fiscal unity arrangements - should keep their tax assessments open and await the decisions of the highest court.