New case law on retroactive establishment of tax group

The Federal Tax Court (BFH) and the local tax court of Cologne recently published decisions on the retroactive establishment of a tax group (Organschaft) for corporate income tax purposes in reorganization cases. In general, to establish a tax group, the controlling entity must hold directly or indirectly more than 50 % of the voting rights of the controlled company from the beginning of the fiscal year of the subsidiary (i.e. financial integration).

In the case decided by the BFH on 28 July 2010 (case reference: I R 111/09), a German partnership contributed its participation in a GmbH into a new subsidiary in exchange for shares in the subsidiary; the contribution was effective retroactively from the beginning of the fiscal year for tax purposes (which was possible in the year at issue). 

The tax authorities rejected the validity of the tax group because the allocation of voting rights to the receiving company under the retroactivity principle does not qualify as a “real” shareholding. the legal fiction of retroactive effect is not sufficient to meet the requirements for forming a tax group -- the allocation of voting rights to the receiving company under the retroactivity principle does not qualify as a “real” shareholding for these purposes. The BFH held – as it did in a previous case on a hive-down with retroactive effect (see Deloitte Tax-News) – that under the general rules governing reorganizations, in a share-for-share transaction the receiving company assumes the legal position of the contributing company, meaning that the tax attributes necessary for forming a tax group must be deemed to be in existence from the beginning of the fiscal year of the receiving company. The BFH thus upheld the taxpayer’s position and confirmed that a tax group could be formed in the year the share-for-share deal was effected provided the subsidiary had been controlled by the company contributing the shares from the beginning of the subsidiary’s fiscal year.

Interestingly, the BFH specifically stated that this position would also apply under the revised Reorganization Tax Act even though retroactively effective share transfers are no longer possible.

In the case decided by the local tax court of Cologne on 10 June 2010 (case reference: 13 K 416/10), the issue was whether it is possible to establish an Organschaft where the controlled subsidiary was established during the fiscal year (the subsidiary in the case was registered on 15 April 2002), followed by a hive-down into that subsidiary with retroactive effect to the beginning of the fiscal year. The Cologne court confirmed the taxpayer’s view, concluding that a tax group could be formed with effect from the beginning of the year of the hive-down. The case is now pending before the BFH (case reference: I R 84/10).

The two decisions are interesting because the German tax authorities are drafting guidance on the new Reorganization Tax Act and are considering limiting the retroactive effect in various situations in which the legal prerequisites for a transaction did not exist at the time of the desired retroactive effective date. It is unclear whether and to what extent the above decisions will influence the position of the tax authorities. Based on informal statements by the authorities, the draft guidance is not expected to be finalized in the near future, so uncertainties will remain. Taxpayers that want to rely on the retroactive effect of certain restructuring transactions should take the (potential) position of the tax authorities into account and, where possible, aim to have the legal prerequisites in place at the time of the desired tax effective date.

If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.