In a recently published decision (case reference I R 68/09), the Federal Tax Court (BFH) rejected a ruling of the local tax court of Cologne with respect to the formal requirements of a profit and loss pooling agreement (PLPA) and, thus, confirmed the very formalistic approach increasingly adopted by both the courts and the tax authorities.
To form a valid tax consolidation (Organschaft), a parent company and its subsidiary must conclude a PLPA that obliges the subsidiary to transfer all profits to its parent and obliges the parent to compensate the subsidiary for any losses incurred. This loss compensation obligation is stipulated in section 302 of the Stock Corporation Act (AktG), and both the BFH and the Federal Ministry of Finance have interpreted the tax law in such a way that the loss compensation obligation under section 302 AktG must be specifically agreed upon in the PLPA if the subsidiary is a GmbH.
The local tax court of Cologne did not follow this interpretation and instead held that such a PLPA does not have to specifically include a loss compensation stipulation according to section 302 SCA to form a valid tax consolidation with a GmbH. In a strongly worded decision, however, the BFH rejected the tax court’s ruling and confirmed its strict view regarding the formal requirements for the acceptance of a PLPA for tax purposes. According to the BFH, the PLPA must specifically include a loss compensation obligation if the subsidiary is a GmbH.
Taxpayers should ensure that they comply with the BFH’s strict interpretation of the PLPA requirements. In view of the BFH’s clear confirmation of its position and the recent trend by the tax authorities to scrutinize the wording of PLPAs, it is critical that PLPAs are drafted carefully to avoid an invalid tax consolidation.
If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.
