One of the requirements for forming a valid tax consolidation under German tax law is that the controlling parent and the subsidiary conclude a profit and loss pooling agreement (PLPA) that obliges the parent to compensate the subsidiary for any losses incurred. This loss absorption obligation is stipulated by section 302 of the Stock Corporation Act (AktG), and both the Federal Tax Court (BFH) and the Ministry of Finance have interpreted the tax law to mean that the loss compensation obligation under section 302 must be specifically agreed upon in the PLPA if the subsidiary is a GmbH.
In a decision dated 28 July 2010 (case reference: I B 27/10, BStBl II 2010, 932), the German Federal Tax Court partially suspended the execution of assessed tax prepayments of a GmbH that concluded a PLPA with its parent company. The German tax authorities challenged the wording of the loss absorption provision in the PLPA on the grounds that it was not in line with the requirements of the law. This would have resulted in the denial of a valid tax consolidation and the various entities being taxed on a stand-alone basis in all years under review.
In the original PLPA concluded in December 2006, the loss absorption provision only referred to section 302 paragraphs 1 and 3 (dealing with the obligation to compensate losses as such and a potential waiver of a loss compensation claim) and not to section 302 in its entirety or to paragraph 4 (dealing with the applicable statute for limitations of loss compensation claims) specifically. Paragraph 4 of section 302, which was added in 2005, must be referred to in all PLPAs concluded after 1 January 2006.
During fiscal year 2009, the GmbH amended the loss absorption provision in the PLPA making reference to all paragraphs of section 302 AktG, but using wording that has been identified by the regional tax office of Rhineland (in guidance issued on 12 August 2009) as detrimental to the existence of a valid PLPA. The offending wording includes a general reference to section 302, followed by a quotation of paragraph 1, without any additional references to paragraphs 3 and 4 of section 302. The tax office rejected both the original and the amended versions of the PLPA (thus denying the existence of a valid tax group) and assessed tax payments and prepayments for the GmbH, treating it as a stand-alone taxpayer.
The BFH has now clarified that the first version of the PLPA in the case was not valid because it lacked a reference to paragraph 4 of section 302 AktG. However, the court concluded that the revised PLPA, combined with the registration of the revised version in the commercial register, was in compliance with the law. Even though this case was only brought before the BFH in preliminary proceedings, the decision is an important clarification that overrules the prior guidance of the regional tax office of Rhineland and therefore should put an end to the debate on the correct wording of PLPAs.
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