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In our article no. 52, we reported on the decision of the European Court of Justice (ECJ) affirming the compatibility of congruent dividend reporting with EU accounting law (DB 1996, 1400 - 27 June 1996). Congruent dividend reporting means that a parent company records a dividend receivable on its books in its fiscal year just ended even though the dividend is not formally authorised by shareholder resolution for a distributing subsidiary with the same fiscal year until after the close of this fiscal year. The practice was questionable because the right of a shareholder to a dividend does not arise under company law until it is formally voted by shareholder resolution, an event which, for legal and practical reasons, seldom if ever occurs until sometime in the fiscal year following that for which the dividend is approved when the subsidiary and the parent have the same fiscal year.
The ECJ has now issued a ruling dated 10 July 1997 (DB 1997, 1513) in which it corrects "obvious errors" contained in its previous judgement and makes changes in the conditions under which congruent dividend reporting is considered permissible. Mention is no longer made of "approval of the financial statements of the subsidiary for the fiscal year just ended before completion of the audit of the parent company" or of "attribution of the dividend to the parent in the subsidiary's financial statements". Instead, the ECJ now requires approval of payment of a dividend to the parent by resolution of the subsidiary's shareholders adopted prior to completion of the audit of the parent for the fiscal year in question.
As we noted in the final paragraph of our June 1996 article (article no. 52), it was never entirely clear in the first place what the ECJ meant by "attribution of the dividend to the parent in the subsidiary's financial statements". Considerable criticism of this requirement in the literature induced the ECJ to amend its decision. The new requirement of a shareholder resolution presupposes approval of the subsidiary's financial statements (an act accomplished by shareholder resolution for a GmbH and generally by vote of the Supervisory Board for an AG), because a dividend can only be voted on the basis of approved financial statements.
As amended, the ECJ's judgement now permits congruent dividend reporting if the following conditions are met:
- the parent company holds a 100 % share in the distributing subsidiary and controls it;
- the parent and the subsidiary are part of a consolidated accounting group under national accounting law;
- both companies have the same fiscal year;
- the subsidiary's shareholders have approved payment of the dividend to the parent by shareholder resolution;
- the shareholder resolution is adopted prior to completion of the audit of the parent company for the same fiscal year for which the dividend is voted; and
- the national court has satisfied itself that the subsidiary's financial statements for the year in question give a true and fair view of its net assets, finances, and earnings.
The German Federal Court of Justice, which had referred the question to the ECJ, is now expected to hold that under the same conditions the parent company is required to show a dividend as a receivable in its commercial accounts.1 Up till now, parent companies had the option of so doing. It is not clear whether the Federal Court of Justice will mandate or permit congruent dividend reporting in situations not involving wholly owned subsidiaries.
For tax purposes, congruent dividend reporting has always been required in Germany wherever it has been optional for commercial accounting purposes. In as much, the decision of the ECJ reaffirms the status quo.
Less than 100 % subsidiaries may still face the tax problems described in our article no. 44.
Should a parent company for some reason wish to avoid congruent dividend reporting, it can perhaps do so by failing to approve the required dividend resolution. The accounting principle of consistency (Stetigkeit) may limit the taxpayer's discretion, however.
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