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In a previous article we reported on a case pending before the European Court of Justice in which the Court appeared likely to reject congruent dividend reporting as incompatible with EU law. Congruent dividend reporting means that a parent company records a dividend on its books as received in its fiscal year just ended even though the dividend is not formally authorised (by shareholder resolution) until after the close of this fiscal year.
The ECJ has now surprised commentators with a judgement (dated 27 June 1996 - C-234/94) affirming the compatibility of congruent dividend reporting with EC law (4th EU Accounting Directive). Specifically, the Court held that congruent dividend reporting by a parent company is permissible provided
- the parent company holds a 100 % share in the distributing
- subsidiary and controls it;
- the parent and the subsidiary are part of a consolidated group under national law;
- both companies have the same fiscal year;
- the financial statements of the subsidiary for the fiscal year just ended are approved (by shareholder resolution for a GmbH, generally by the Supervisory Board for an AG) before completion of the audit of the parent company's financial statements for the same year;
- the financial statements of the subsidiary for the fiscal year in question "attribute" the dividend to the parent; 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. Up till now, parent companies had the option of so doing. It is not clear whether the Federal Court of Justice will mandate congruent dividend reporting in situations not involving wholly owned subsidiaries.
For tax purposes, congruent dividend reporting has always been required wherever it has been optional for commercial accounting purposes. In as much, the decision of the European Court of Justice reaffirms the status quo. The uncertainty surrounding less than 100 % subsidiaries may still pose the tax problems described in our previous article.
Should a parent company for some reason wish to avoid congruent dividend reporting, it has opportunities to do so by delaying approval of its subsidiary's financial statements until after completion of audit of its own financial statements. Or it could prevent "attribution" of the dividend to itself in its subsidiary's financials. Exactly what the Court meant by "attribution" is unclear at present. Probably, it was referring to a dividend liability shown by the subsidiary in favour of the parent. Showing such a liability in turn presupposes a corresponding dividend proposal by the subsidiary's management.
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