For income and trade tax purposes a fiscal unity requires among other things the conclusion of a profit and loss pooling agreement which in order to be recognized for income tax purposes must satisfy tight formal requirements. Only recently the Federal Fiscal Court held in a ruling dated 3 March 2010 (I R 68/09) that a profit and loss pooling agreement must contain an explicit reference to the obligation to assume losses as set forth under clause Sec. 302 SCA. Often profit and loss pooling agreements thus contain the following language: “In accordance with Sec. 302 SCA Y GmbH is obliged to assume any losses incurred by X GmbH if and to the extent such losses are not sheltered by gains from the release of free reserves which have been built during the term of this agreement.”
However, the Regional Tax Offices of Rhineland and Münster in their decree dated 12 August 2009 (S 2770 – 1015 St 131 (OFD Rhineland) / S 2770 – 249 St 13 – 13 (Münster)) now take the view that such a language does not satisfy the formal requirements stipulated by the Federal Fiscal Court. A fiscal unity which is based on a profit and loss pooling agreement containing such language shall not be recognized for income and trade tax purposes.
Based on such view many fiscal unities would be at risk. If a fiscal unity were not recognized, in particular, taxation of the relevant group on a consolidated basis would not be allowed and profit transfers under the profit and loss pooling agreement would be re-characterized into hidden profit distributions.
However, the Federal Fiscal Court published a ruling on 1 September 2010 in which it does not follow the view of the tax authorities but holds that the language set out above is sufficient in order to establish a valid fiscal entity. Presumably, following the the decision of the Federal Fiscal Court the tax authorities will change their view. Therefore, fiscal unities that are established on the basis of a profit and loss pooling agreement which contains the said language should — in contrast to the inititial expectation based on the tax authorities’ decree — not be at risk.