In a recently published decision, the Federal Tax Court (BFH) confirmed a decision of the lower tax court of Lower Saxony relating to the trade tax exemption of a head of a German tax group with regard to non-exempt income transferred under a profit and loss pooling agreement (PLPA) from one of its subsidiaries (case reference I R 41/09).
In the case, a controlling company in a tax group was actively engaged in operating a retirement and nursing home, an activity that is exempt from trade tax. At the same time, the controlling company received profits under a PLPA with a subsidiary that was exclusively engaged in catering and cleaning services for the retirement and nursing home of the parent company, an activity that, in and of itself, is not exempt from trade tax.
The BFH confirmed that, from a general perspective, it is possible for a company that carries out activities that are exempt from trade tax to act as a controlling company in a tax group for trade tax purposes. The court also confirmed that income that is subject to trade tax and transferred under a PLPA to the level of the controlling company, is subject to trade tax at that level even if the controlling company itself only carries out activities that are not subject to trade tax.
The court refused to accept the argument that the subsidiary in the case had only been set up for operational and managing purposes to render the services exclusively to the parent company and was part of a tax group with the parent company. The court denied the effect of a full and complete legal amalgamation of two companies being part of a tax group and based its decision on the legal separation of the controlling and the controlled entity in a tax group.
The BFH decision demonstrates that careful planning is required in cases where a company is engaged in trade tax-exempt activities and these activities are outsourced in part to a subsidiary in a tax group to avoid harmful trade tax consequences.
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