In November 2013, the German Federal Tax Court (Bundesfinanzhof) held that an intra-group reorganization involving the transfer of shares in a German subsidiary does not constitute a good cause to terminate the fiscal unity (Organschaft).
According to the German Corporate Income Tax Act, the formation of a fiscal unity that enables the netting of profits and losses of the parent and its subsidiary is based on a corporate agreement. The tax law stipulates that such agreement requires a minimum term of five years. As an exception to this five-year minimum term, the law permits an early termination based on good cause. Generally, the sale and transfer of a subsidiary is such good cause and has been recognized by the German tax authority when the five-year minimum term has not been adhered to.
In contrast to long-standing practice, the German Federal Tax Court now holds that an internal share transfer does not qualify for a termination for good cause. Consequently, if the five-year minimum term is not respected, the fiscal unity will be invalid and not effective from the very beginning. The affected entities will be treated as if no fiscal unity had ever existed and will be taxed on a stand-alone basis. The German Federal Tax Court does not comment on third party transactions.
This new case law will affect many group internal reorganizations since the fiscal unity is a very common structure to optimize the tax bill. The adherence to a five-year minimum term will become a crucial issue in such cases.
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