A corporate tax group requires, among other things, that the controlling company holds an uninterrupted interest in the controlled company from the beginning of its financial year to such an extent that it is entitled to the majority of the voting rights from the shares in the controlled company, so-called financial integration (section 14 para. 1 sentence 1 no. 1 of the German Corporation Tax Act). If the controlling company is converted, the time during which the previous (converted) controlling company was continuously entitled to the required majority of votes in the controlled company is credited to the acquiring legal entity for the fulfillment of this requirement. In its judgments of July 11, 2023 (case no. I R 21/20; I R 36/20; I R 40/20; I R 45/20), the German Federal Fiscal Court took a position on the legal question of whether the requirement of financial integration is also met in the case of a conversion during the year, i.e. during the current financial year of the controlled company.
In one of the aforementioned judgments, there was originally a corporate tax group between A-GmbH as the controlled company and B-GmbH as the controlling company. After X-OHG acquired all shares of B-GmbH in March 2015, the latter was merged into X-OHG in November 2015 with retroactive tax effect from April 1, 2015. In its tax returns for 2015, A-GmbH, whose financial year began on January 1, 2015, assumed a continued tax group relationship with X-OHG and accordingly declared income of EUR 0. The tax office rejected this in accordance with the opinion published by the tax authorities (reorganization tax circular of November 11, 2011, no. Org. 02). Due to the subsequent conversion date of April 1, 2015, the requirement of financial integration of the controlled company into the (new) controlling company (X-OHG) had not (yet) been met at the beginning of the financial year of A-GmbH. The tax court of first instance and the German Federal Fiscal Court took a different view.
Accordingly, the financial integration of the controlled company into the controlling company existed for the entire year in 2015. This is not based on the tax conversion date, but on a special provision of the German Reorganization Tax Act, which provides for the acquiring legal entity (X-OHG) to assume the legal status of the transferring legal entity (B-GmbH), the so-called “footstep theory”. This also includes the financial integration of the controlled company (A-GmbH) into the controlling company (B-GmbH) as a prerequisite for a corporate tax group. The fact that the transfer date (April 1, 2015) is not identical to the start of the financial year of the controlled company (January 1, 2015) is not detrimental, contrary to the opinion of the tax authorities. The acquiring legal entity enters into the same legal position as the transferring legal entity with regard to financial integration, even if the transfer date for conversion tax purposes is not related back to the start of the financial year of the controlled company.
It is therefore sufficient for the recognition of a corporate tax group if, from the beginning of the financial year of the controlled company, there is financial integration first with the transferring legal entity and then with the acquiring legal entity. In the three further rulings from July 11, 2023, the German Federal Fiscal Court also applies the footstep theory to other reorganizations accordingly.
In one of the aforementioned judgments, there was originally a corporate tax group between A-GmbH as the controlled company and B-GmbH as the controlling company. After X-OHG acquired all shares of B-GmbH in March 2015, the latter was merged into X-OHG in November 2015 with retroactive tax effect from April 1, 2015. In its tax returns for 2015, A-GmbH, whose financial year began on January 1, 2015, assumed a continued tax group relationship with X-OHG and accordingly declared income of EUR 0. The tax office rejected this in accordance with the opinion published by the tax authorities (reorganization tax circular of November 11, 2011, no. Org. 02). Due to the subsequent conversion date of April 1, 2015, the requirement of financial integration of the controlled company into the (new) controlling company (X-OHG) had not (yet) been met at the beginning of the financial year of A-GmbH. The tax court of first instance and the German Federal Fiscal Court took a different view.
Accordingly, the financial integration of the controlled company into the controlling company existed for the entire year in 2015. This is not based on the tax conversion date, but on a special provision of the German Reorganization Tax Act, which provides for the acquiring legal entity (X-OHG) to assume the legal status of the transferring legal entity (B-GmbH), the so-called “footstep theory”. This also includes the financial integration of the controlled company (A-GmbH) into the controlling company (B-GmbH) as a prerequisite for a corporate tax group. The fact that the transfer date (April 1, 2015) is not identical to the start of the financial year of the controlled company (January 1, 2015) is not detrimental, contrary to the opinion of the tax authorities. The acquiring legal entity enters into the same legal position as the transferring legal entity with regard to financial integration, even if the transfer date for conversion tax purposes is not related back to the start of the financial year of the controlled company.
It is therefore sufficient for the recognition of a corporate tax group if, from the beginning of the financial year of the controlled company, there is financial integration first with the transferring legal entity and then with the acquiring legal entity. In the three further rulings from July 11, 2023, the German Federal Fiscal Court also applies the footstep theory to other reorganizations accordingly.
Notice:
The tax authorities are currently revising their reorganization tax circular of November 11, 2011. It remains to be seen whether they will include the current fundamental rulings on reorganization during the year in tax group cases and thus adapt their previously different opinion to case law of the Federal Fiscal Court.