Requirements for fulfilling a profit transfer agreement

To avoid challenging the legal validity of an income tax group, the underlying profit transfer agreement has to be agreed upon for at least five years and actually fulfilled throughout its entire life span. This requires profit and loss transfers via actual payments or offset agreements. In its ruling of November 5, 2025 (case no. I R 37/22), the German Federal Fiscal Court (Bundesfinanzhof; BHF) has now, for the first time, decided under what conditions this happens in a timely manner.

Facts of the case

There was a profit transfer agreement between a limited liability company (GmbH) and its sole shareholder. The GmbH recognized the transferable profit as liability against its sole shareholder but did not actually transfer it. Years later, they legally agreed to offset profit transfer liabilities against receivables. According to tax authorities, however, the profit transfer agreement was not actually fulfilled, meaning the GmbH and its sole shareholder were not a legally valid income tax group. Both the lower tax court and the BFH agree with this opinion.

Decision by the BFH

According to the BFH, an income tax group is only legally valid if subsidiaries transfer profits to their parent companies in a timely manner. Referring to German national accounting standards, profit transfers are considered timely if they happen within twelve months of approving the subsidiary’s financial statement. Transferring profits at any time or after ending the income tax group is not sufficient. The court deduces this from the wording of the German Corporate Tax Act. Furthermore, extending the time frame for fulfillment in this way would mean that taxpayers could dissolve the tax group retroactively for an unlimited period, rather than only within the minimum period of five years. In the present case, the profit transfer claims were not fulfilled until years later through the set-off agreement, and thus well beyond the twelve-month period.

In addition, the BFH has confirmed its earlier position that the actual implementation of a profit transfer agreement also requires the resulting receivables and liabilities to be recorded in the financial statements. In this regard, it must be objectively verifiable from the accounting records that the corresponding liabilities of the controlled entity to the controlling entity have been recorded and disclosed in the balance sheet. This ultimately also sufficiently and clearly documents the actual implementation of the profit transfer agreement. However, the accounting treatment was not decisive in the present case.

Notice:

If group members wish to transfer profits in the form of offsets against receivables, we advise them to conclude the offset agreement within twelve months of approving the subsidiary’s financial statement. Furthermore, we recommend netting these receivables and liabilities in financial accounts for the same reporting period. If group members ignore these recommendations, the income tax group may become invalid.