Wednesday night, the joint committee of German parliament has adopted changes to its group taxation legislation, which mainly focus on relaxing rules on profit transfers, while at the same time increasing the red tape with respect to the wording of the profit-and-loss-pooling agreement necessary to conclude a tax group. It is expected that the law will be adopted by both houses early next year.
The most helpful amendment allows fiscal unities to be accepted for tax purposes, even if the profit transferred was not computed correctly, where such profit was resolved upon with the annual accounts. This will require that the fault is not based on a lack of diligence and that it is corrected with the next possible annual financial statements. Diligence requirements are usually met, if the respective annual accounts have received an unqualified auditor’s certificate.
As far as the wording of profit-and-loss-pooling agreements with a GmbH is concerned, formal requirements have been tightened. Even to date, such agreements were required to reference the laws on loss assumption pursuant to Sec. 302 of the German Stock Corporation Act. In future, such reference will have to be made dynamically, so as to ensure that at all times, the then current version of that provision is referenced. Here, even old profit-and-loss-pooling agreements will need to be amended. The period, by which amendments need to be made, will end on 31 December 2014. Therefore, we recommend a swift due-diligence exercise at the beginning of 2013, in order for amendments to be made in a timely manner, where necessary.
The wording now clarifies that, as already accepted by the tax authorities, EU companies whose place of management is in Germany, can be part of a German tax group as controlled companies in such group.
Also, the loss carry-back allowance has been increased from EUR 511,500 to EUR 1,000,000. This will allow companies to obtain a higher cash tax refund for their last profitable year, once they run into a period of losses.
At the same time, the dual consolidated loss rule has been re-worded in a broader manner. As outlined in our newsletter on the draft legislation, it cannot be excluded that the wording is read as disallowing losses of a tax group member company in certain situations, where foreign countries include non-territorial income and losses in their national taxation. This does, inter alia, concern corporate groups with US parents. Where, for example, under US law a check-the-box election has been made either for the loss-making company or for the tax group parent, one might read the law as saying that such losses, as being considered in the US parent’s US tax returns, can no longer be considered in Germany. We understand that this clearly was not intended when proposing the amendment, but the wording can be construed to cover just that. This amendment is supposed to take retro-active effect for all open years. Whether this is permissive, remains questionable. Therefore, German tax groups particularly with US ultimate parents should be reviewed carefully.