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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.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.
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