With decision dated 4 March 2009 (I R 1/08) the Federal Fiscal Court ruled that compensation payments to minority shareholders of a company, which is obliged to transfer its profit, shall not be accepted for tax purposes if the compensation payment comprises of a fixed and a variable portion and the minority shareholder is therewith treated as if a profit and loss transfer agreement was not in existence and — full distribution of profits assumed — the minority shareholder received a dividend. The Federal Fiscal Court held that in such case the fiscal unity is not acceptable by lack of a transfer of the total profit. The agreed payments in the case at hand go, according to the Federal Fiscal Court’s view, beyond the requirements of Sec. 304 SCA and from an economic point of view suspend the effect of the profit transfer.
In conclusion, the Federal Fiscal Court goes beyond its previous decisions. In its decision dated 31 March 1976 (I R 123/74) the Federal Fiscal Court did not accept an agreement for tax purposes according to which the minority shareholders should receive a compensation payment equal to the amount they would have received without a profit and loss pooling agreement. In contrast to the case at hand in that case the payments were based on an agreement according to which the compensation should in total be calculated on the basis of the profit and not split into a fixed and a variable portion.
The decision dated 9 March 2009 is surprising insofar as the Federal Fiscal Court does not consider the fact that a fixed compensation payment is payable even if the company suffers losses, and does not attach importance to the opinions in corporate law literature which the tax authorities as well as the prevailing opinion in tax literature have followed. According to such opinion the provision of Sec. 304 SCA only determines a minimum amount of the compensation payment and therefore the agreement of a variable portion exceeding this compensation payment shall not be harmful with respect to the validity of the profit and loss pooling agreement. Only compensation payments falling below the amount determined in accordance with Sec. 304 SCA shall be prohibited.
In addition, the decision of the Federal Fiscal Court does not comment on the question whether the acceptance of a fiscal unity for tax purposes is also questionable, if an additional variable portion is granted, which however does not result in the minority shareholder being in the position as he would be if the profit and loss pooling agreement was not in existence.
In practice the decision dated 9 March 2009 therefore results in uncertainties. Even though one can take in general from it that not any additional variable portion of a compensation payment would result in an invalidity of a fiscal unity; currently, however, the borderline between acceptable and non-acceptable is still uncertain.
According to a circular issued by the tax authorities, the decision shall not apply for other cases than the case at hand. The tax authorities refer in this respect to their previous practice. They hold that the decision of the Federal Fiscal Court is not in line with Sec. 14 (1) s. 1 Corporate Income Tax Act (CITA, Körperschaftsteuergesetz) and the general concept of Sec. 304 SCA. The circular repeats the tax authorities’ previous opinion that Sec. 304 (2) s. 1 SCA only determines the minimum amount of a compensation.