BFH rules on validity of PLPA requirement for German tax group

The formation of a German tax group (Organschaft) requires the conclusion and the proper execution of a profit and loss pooling agreement (PLPA), under which the subsidiary’s GAAP profits are transferred to the parent company and the subsidiary’s German GAAP losses are assumed by the parent.

The Federal Tax Court (BFH) recently ruled on the validity of a PLPA (case reference: IV R 21/07). In the case, the GAAP profit in the year after the PLPA was concluded was transferred in full to the parent company, although the subsidiary had GAAP losses carried forward from previous years. This was not considered to comply with the provisions of the Stock Corporations Act and, hence, the court held that the PLPA was not properly executed.

The BFH rejected the argument that the situation could be mitigated by amending the original financial statements on a retroactive basis based on the specific facts of the case. The BFH explicitly left open the question of whether a formal and substantive correction of the historic profit transfer at a later point in time could generally change the outcome.

Since the PLPA was not executed properly, the BFH held that the tax group was not validly established. Although the court decision is in line with previous case law, it should be noted that the GAAP treatment in this case deviates from the tax treatment in the case of an Organschaft. While the proper execution of a PLPA, including the need to offset GAAP loss carryforwards existing before the PLPA was concluded, is required for a valid tax group to exist, for tax purposes, taxable income of the subsidiary is fully attributed to the parent and cannot be offset against tax loss carryforwards existing before the tax group was formed.

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