The Federal Fiscal Court (Bundesfinanzhof, BFH) overruled its former decisions on the possibility of accepting a tax group for VAT purposes even without the group parent holding a participation in the respective group company (BFH dated 1 December 2010, XI R 43/08 and dated 22 April 2010, V R 9/09).
According to Sec. 2 (2) No. 2 Value Added Tax Act, a tax group for VAT purposes requires that a legal entity is integrated financially, economically and organizationally in the business of the group parent taking the overall facts of the specific case into consideration. Under a tax group for VAT purposes the group company is viewed as dependent entity, so that supplies provided by the group company to the group parent or vice versa are not subject to VAT (so-called internal supplies).
An entity is, in principle, only financially integrated in the business of a parent company if the group parent – directly or indirectly through a subsidiary – holds a participation in the group company granting more than 50% of the voting rights in the group company. Notwithstanding the above, the BFH and the German tax authorities held the view that in case of a partnership being the group parent, a group company was financially integrated also if the shareholders of the group parent (and not the group parent itself) held the majority of shares in the group company. The reason for this was that with respect to the partnership and the group company the same shareholders held the majority of voting rights.
In its judgment dated 22 April 2010 (V R 9/09), the BFH overrules its former decisions so that for a tax group for VAT purposes an (in)direct participation of the group parent in the group company will be required - even if a partnership is the group parent. The BFH bases its view on the fact that, according to the law, an integration requires a super- and subordination relationship between the group parent and the group company and mere sister companies do not share such relationship. It is not sufficient that several shareholders hold the majority of shares in both sister companies as these shareholders will not necessarily exercise their voting rights uniformly – even if the shareholders are next of kin.
The judgment is particularly relevant for cases of so-called company split-ups (Betriebsaufspaltung) — in which real property or other essential assets are let/rented out to an affiliated business partnership or corporation — as in such cases, as a rule, a tax group for tax purposes was accepted and for cases where the tax group for VAT purposes was used to provide supplies to a company that cannot claim refund of input VAT without charging VAT.
The question arises if a VAT group can be “saved” even with respect to sister companies if (i) a domination and profit transfer agreement is entered into between the sister companies or (ii) one single shareholder holds the majority of shares in the sister companies and serves as their managing director. The BFH did not give its view on these questions in the decision of 22 April 2010.
However, the BFH answered the question of the impact of a domination and profit transfer agreement on the acceptance of the tax group for VAT purposes in case of sister companies in its decision dated 1 December 2010 (XI R 43/08).
In that case, an individual was the sole shareholder and managing director of several limited liability companies. The sister companies had concluded a domination and profit transfer agreement. The BFH also held the view that there was no financial integration and therefore the tax group for VAT purposes could not be accepted. Thus, it is not sufficient that the individual, holding a majority interest in both limited liability companies, was actually able to control both companies. The domination and profit transfer agreement does not lead to a financial integration as such agreement cannot replace the missing participation of the group parent in the group company.
The two BFH decisions give reason to check existing tax groups for VAT purposes – especially in cases of company split-ups (see above) – and take (if necessary) restructuring steps in order to fulfill the requirement of a financial integration even after the change in doctrine. The conclusion of a domination and profit transfer agreement will not be sufficient in that respect. In practice, attention should be paid to the fact that, in the decided case, the plaintive limited liability company could not claim mitigation of detrimental tax effects due to legitimate expectations on the basis of the previous approach of the BFH and the tax authorities as it had not filed any VAT returns.