Actual implementation of a profit and loss transfer agreement

In the context of a consolidated tax group for corporation and trade tax purposes, a controlled company must oblige itself by a profit and loss transfer agreement to transfer its entire profit to the controlling company. The profit and loss transfer agreement is subject to strict formalistic requirements, in particular it must be concluded for at least five years and must actually be implemented during its entire period of validity. Since the requirements for the actual implementation are not further defined by law, there has been legal uncertainty for legal practitioners for some time. Now, in its ruling of June 21, 2022 (Case No. 10 K 1406/18), the Cologne Fiscal Court has decided on a situation that is frequently encountered in practice.

A controlled company only booked the profit to be transferred to the controlling company plus interest to be paid against the shareholder clearing account. Neither counterclaims nor lump-sum payments were recorded there, nor was there an actual cash flow between the controlled company and the controlling company. In this constellation, the tax office saw no proper accounting and corresponding transfer of the profit, disputed the actual implementation of the profit and loss transfer agreement and consequently denied the consolidated tax group for corporation and trade tax purposes. The Cologne Fiscal Court had the same opinion.

With reference to the relevant case law of the German Federal Fiscal Court, a profit and loss transfer agreement in constellations comparable to the case in dispute is only actually implemented if the profits determined in accordance with the principles of proper accounting are actually transferred to the controlling company by payment or offsetting. The simple booking to a shareholders’ clearing account is only equivalent to the reporting of a liability to the controlling company but does not constitute an actual implementation of the profit and loss transfer agreement.

The court confirmed that the claim/liability from the profit and loss transfer agreement must also be fulfilled close to the due date - preparation of the balance sheet of the controlling company. Otherwise, in its opinion, it is not ensured that the profit to be transferred to the controlling company according to the profit and loss transfer agreement is actually subject to the correct taxation at the controlling company. However, the Cologne Fiscal Court does not comment on the time span of three to twelve months advocated by the tax authorities. However, it points out that in individual cases, special operational reasons - which were not present in the case in dispute - can certainly lead to a longer period.