In a decision dated 12 January 2011 (I R 3/10) the Federal Fiscal Court (Bundesfinanzhof, BFH) held that the minimum term for profit and loss transfer agreements for a fiscal unity to be recognized is five full years, i.e. 60 months, not five fiscal years.
According to Sec. 14 (1) s. 1 No. 3 of the German Corporate Income Tax Act (CTA), the profit and loss transfer agreement (PLTA) between the group parent and the controlled company in a fiscal unity needs to be concluded for a term of at least five years. So far, there had not been a final decision whether this required the minimum term to be five fiscal years or five full years. According to some authors in literature and some Fiscal Courts of First Instance, a minimum term of five fiscal years is sufficient. As a consequence, the minimum term could cover less than five full years if it comprises one or more stub years. In contrast, according to the view that seems to be prevailing in literature and is also applied by the German tax authorities (see Sec. 60 (2) s. 1 Corporate Income Tax Guidelines), the minimum term of the PLTA needs to encompass five full years.
The BFH follows the latter view. It bases its decision on the wording of the relevant provisions and dismisses the arguments brought forward by those holding the contrasting view.
As practitioners adapted to the view held by the tax authorities that the minimum term stipulated by Sec. 14 (1) s. 1 No. 3 CTA is five full years, and drafted PLTAs accordingly, the present decision is not a surprise and should not necessitate material amendments to existing PLTAs.