The local tax court of Saxony (case reference 6 K 2295/06) recently ruled on a case in which a company that came into existence as a result of a demerger was contributed into its sister company. The demerger and the subsequent contribution both were carried out in the same fiscal year and, for German tax purposes, were effective retroactively as from the beginning of the fiscal year of the new company. A profit and loss pooling agreement was then concluded between the new company that resulted from the demerger and its new parent company (former sister company).
According to the German tax group (Organschaft) rules, the head of the tax group must continuously hold the majority of the voting rights in the controlled entity for the entire fiscal year of the controlled entity (i.e. “financial integration”). The tax court held that the financial integration requirement was not met as from the beginning of the fiscal year because the head of the tax group did not have actual control over the day-to-day business of the controlled entity during the period from the beginning of the fiscal year to the date the contribution of the shares in the controlled entity was decided. The court refused to accept the argument that the tax group head in theory had the opportunity (i.e. essentially a fictitious opportunity) to control the daily business of the controlled company based on the retroactive effect with which the transactions were carried out. The court noted that the controlled entity did not exist as an independent corporation as of the beginning of the fiscal year and the head of the tax group entered into the shareholding of the controlled entity only during the course of the relevant fiscal year.
In denying the presence of financial integration for the year in which the demerger and contribution took place, the local tax court confirmed a Federal Tax Court (BFH) decision of 17 September 2003. Both the local tax court and the BFH agreed that the financial integration requirement must be met based on actual facts and circumstances and cannot be deemed to exist based on a fiction for tax purposes. The local tax court decision is also in line with guidance issued by the tax authorities. The case is now pending before the BFH.
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