The Federal Fiscal Court held in two rulings dated 28 July 2010 (I R 89/09 and I R 111/09) that a fiscal unity may be established retroactively in cases where the parent acquires the majority participation in the subsidiary only during the current fiscal year by way of a reorganization or contribution covered by the Reorganization Tax Act (Umwandlungssteuergesetz, RTA).

A fiscal unity under German law requires that the parent company holds the majority of voting rights in the subsidiary (so-called financial integration) from the beginning of the subsidiary’s fiscal year. On the other hand, certain reorganizations can be made for purposes of commercial law and tax law with a retroactive effect of up to eight months. According to the German tax authorities’ current view, it is not possible to form a fiscal unity with retroactive effect to the beginning of the current fiscal year if the financial integration is only established in the course of the fiscal year due to a reorganization or contribution even if the reorganization is treated under the RTA as having taken place on the beginning of the fiscal year. The tax authorities argue that the fiscal integration as a condition for fiscal unity is factual in nature and therefore cannot be deemed to exist retroactively on the basis of a legal fiction.

The Federal Fiscal Courts’s rulings contradict the view held until now by the German tax authorities. The BFH did not base its view contrasting from that of the tax authorities on the fiscal retroactive effect that reorganizations under the RTA may have. Rather, its arguments rest on the provisions in the RTA that treat the entity acquiring a business or shares in the course of a reorganization as the successor in the tax position of the entity transferring such business or shares. For this reason, the underlying principles of the Federal Fiscal Court’s rulings should also apply under the current RTA, which has been revised in recent years. In particular, this should also be true for share for share exchanges, despite the fact that share for share exchanges can no longer be implemented with a retroactive effect for tax purposes after the recent revision of the RTA.

The rulings of the Federal Fiscal Court allow taxpayers to establish a fiscal unity as of the beginning of the current fiscal year in the case of reorganizations. This should also do away with the need to change the subsidiary’s fiscal year, which was formerly often necessary in order to benefit from the advantages of a fiscal unity shortly after a reorganization.

As can be seen in one of the two rulings, the retroactive formation of a fiscal unity is not only possible in situations in which the entity transferring the shares holds a majority in the future subsidiary before the transfer (or another reorganization, e.g. a change of corporate form). Rather, this also applies to cases in which the future subsidiary is established by the future parent (or the entity subsequently transferring shares in the future subsidiary), e.g. by way of a hive-down, i.e. also a subsidiary established in the course of the fiscal year may enter into a fiscal unity with effect as of the beginning of the fiscal year.

The basic effect of the rulings of the Federal Fiscal Court is rather clear, and it is also quite obvious that it should also apply to the revised RTA. However, some doubts remain whether and to what degree the tax authorities will accept the substance of the rulings. As long as the tax authorities have not stated their position in this respect (e.g. in the new circular on the RTA, which is expected to be published soon), structures that depend on the retroactive establishment of a fiscal unity after a reorganization or a contribution of shares should only be implemented on the basis of a binding ruling.