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The decision of the European Court of Justice on the permissibility of congruent dividend reporting under EU accounting law has been the topic of several past articles. Most recently, we reported on the ECJ's ruling of 10 July 1997 by which it corrected "obvious errors" in its prior decision dated 27 June 1996 (article no. 106). 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 issue was referred to the ECJ by the German Federal Court of Justice.
1. Decision by the Federal Court of Justice
As anticipated, the Federal Court of Justice has now held that congruent dividend reporting is mandatory in those circumstances in which the ECJ held it to be permissible (DStR 1998, 383 - 12 January 1998). The requirements established by the ECJ and adopted by the Federal Court of Justice are as follows:
- 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 court explains its decision in terms of the general German accounting principle that profit is only to be shown on the balance sheet if it has been realised (sec. 252 (1) no. 4 HGB). Realisation, the court explains, is an economic concept, not a legal one. What is important is therefore not whether a receivable has accrued as a legal matter, but whether it has become sufficiently definite ("concretised") as an economic matter to justify recording it on the balance sheet. A receivable is sufficiently definite if its material economic causation relates to the fiscal year just expired and the fulfilment of the remaining legal requirements on which its formal existence is conditioned can be expected with certainty.
The key event on which the legal existence of a dividend receivable is conditioned is the shareholder resolution approving the dividend. If the first three requirements listed above are met, the court states that the subsequent adoption of the shareholder resolution can be regarded as evidence of the firm intention of the shareholders as of the balance sheet date to approve the dividend. In as much, the subsequent resolution is not so much a subsequent new event as evidence retrospectively obtained on the status at the balance sheet date. The court thus strives to fit the shareholder resolution into the category of "value-elucidating" events (wertaufhellende Erreignisse), of which account can be taken up till the end of the audit process, as opposed to "value-influencing events" (wertbildende Erreignisse), for which the balance sheet date is an absolute cut-off point.
Consistent with its theory, the court creates an exception from the new rule if "it is certain that the resolution approving the dividend was influenced by circumstances not arising until the following fiscal year" (p. 384/1).
2. Consequences of the decision
The decision of the Federal Court of Justice will have no tax consequences. Under prior case law, congruent dividend reporting was optional for commercial accounting purposes under the circumstances of the case decided. A basic tax accounting rule states that optional capitalisation for commercial accounting purposes translates into mandatory capitalisation in the tax accounts. For tax purposes, congruent dividend accounting has thus long been mandatory in cases such as that now decided.
The impact of the decision is therefore in the commercial accounting area. German companies which previously found it convenient not to capitalise dividends receivable in their commercial accounts will now often be forced to do so unless they purposefully delay shareholder approval of dividends until after the audit of the parent's financial statements has been concluded. This would appear much easier than to make a showing that the dividend resolution was influenced by considerations not in existence at the end of the prior fiscal year.
The decision will affect all German holding companies, whether these hold shares in German companies or in foreign companies and whether they are part of a German or a foreign corporate group.
The decision is likely to be the first of several on the same topic because it does not settle the issue of congruent dividend accounting in other circumstances, e.g. when the parent controls the distributing subsidiary, but holds less than all of its shares.
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