13.08.2014New requirements for profit and loss pooling agreements may require action before 31 December 2014
Strict formal requirements must be met to form a valid tax consolidated group (Organschaft) under German tax law, and a new requirement related to the wording of the loss absorption provision in a profit and loss pooling agreement (PLPA) may require companies to take action before 31 December 2014. This requirement is relevant in any situation in which a German GmbH (limited liability company) is a controlled subsidiary in a tax group.
Germany’s tax consolidated group regime is based on a legal concept and has tax, legal and accounting consequences. One of the requirements to form a tax consolidated group is that the members must conclude a valid PLPA for at least five years. A PLPA requires a controlled subsidiary in a group to automatically transfer its annual profits to the controlling parent company; where the controlled entity has incurred losses, the controlling entity must compensate the subsidiary for those losses.
Before 26 February 2013, a PLPA had to contain a provision for the absorption of losses that was in accordance with section 302 of the Stock Corporation Act. Under amended rules that apply as from that date, the PLPA must contain a provision for the absorption of losses that specifically refers to the current version of section 302, as amended from time to time.
The PLPA must contain the correct wording for the agreement to be valid; failure to use the appropriate wording could result in invalidation of the tax consolidation, with the result that the companies that are part of the PLPA could be taxed on a stand-alone basis instead of on a consolidated basis.
Under the grandfathering rule that accompanied the change in the law, the revised requirement for the recognition of a tax consolidated group is mandatory for all PLPAs concluded or amended after 26 February 2013; PLPAs concluded before that date, however, do not need to be amended. However, if the loss absorption provision in a pre-23 February 2013 PLPA was not in line with the wording requirements under the previous law, the deficiency may be remedied by:
- Terminating the PLPA and the tax consolidated group before 1 January 2015; or
- Amending the PLPA to be conform to the requirements under the post-26 February 2013 law before 1 January 2015. The amendment PLPA must become valid (i.e. be registered in the commercial register) before 1 January 2015.
Since the nonrecognition of a PLPA could have severe tax consequences and could lead to significant additional German tax, taxpayers should analyze their PLPAs to determine whether any action is required before 1 January 2015.
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