Many entrepreneurs would like to offset the profits and losses of a subsidiary of their holding company. However, this is primarily possible directly between the subsidiaries. At the latest during an operational test, it becomes clear that no direct calculation is possible. However, one can very well offset the profits and losses with the involvement of the holding company. However, this requires a special corporate structure, namely an income tax organization. Through a profit and loss transfer agreement, the holding company receives the profits and losses of its subsidiaries in order to offset them for tax purposes at that level. However, the profit and loss transfer agreement also obliges the holding company to compensate the losses of its subsidiaries.

In order to approach an answer to this question, we have to deal with the associated tax law. We assume that both the holding company and its subsidiaries are in the legal form of the GmbH. So now some of the subsidiaries generate profits, others generate losses, and it is therefore obvious that you want to offset them within the holding company structure. However, corporations as legal entities are each independent tax entities. Thus, each subsidiary, but also the parent company, is taxable for its own profits. Conversely, they also accumulate losses individually. This means that each company within the holding structure has its own loss carry-forward (if losses are incurred). Accordingly, each company must decide for itself when to offset its carried forward losses with current profits.

So far, there is in no way any indication that you can offset profits and losses between individual subsidiaries within a holding company. So is that already the definitive answer?

Now one or the other entrepreneur may do without sound tax advice, especially in the field of tax design. If such an entrepreneur now sees that a subsidiary of his holding company generates losses while the others record profits, then he or she may think that the subsidiary can compensate for the loss by issuing bills to the other sister companies for more or less insubstantial services. And yes, this will work, because the incoming payments made in this way will enable the loss-making subsidiary to compensate its losses. At the same time, these claims reduce profits for the other sister companies, so that they even save taxes.

“Great, from one disadvantage you have generated several advantages,” one would like to congratulate. However, this satisfied high feeling often lasts only briefly. Even at the next audit, this shift in profits to eliminate losses will certainly attract attention from a loss-making subsidiary. Or to put it more precisely: the external auditors will notice the hidden profit distributions and ensure that they are tax reversed. In the end, the regular taxes are incurred. It also notes the loss carry-forward of the loss-making subsidiary. In short, the subsidiaries of a holding company are in no way able to offset profits and losses directly or in any other way.

So that was it? There is no way to offset profits and losses of subsidiaries of a holding directly among themselves? The short answer is: Yes, subsidiaries of a holding company cannot offset their profits and losses directly against each other. But there is still a method of offsetting the profits and losses of the subsidiaries of a holding company, only indirectly.

Of course, legislators also recognized that subsidiaries of a holding company should have the opportunity to offset their profits and losses. For this purpose, however, a special construct has been set up with which this should be possible, namely the organization. An organisation is a group of companies that is oriented towards a holding structure. In doing so, they are combined in accordance with §§ 14 ff. KStG two or more companies in order to be taxed as a unit. Logically, this means that they offset their profits and losses.

The prerequisite for such an income tax organization is that all affiliated companies conclude a profit or loss transfer agreement with each other. Colloquially, it is also known as the profit transfer agreement. This stipulates that the undertakings thus contractually linked undertake that the company which controls the subsidiaries as the body carrying them receives the profits of its subsidiaries. The subsidiaries of an organization are therefore simply called organ companies. Conversely, a sponsor of an organ company must compensate for any losses. However, this indirectly leads to the organ carrier being able to offset the profits and losses of the organ companies before the losses are offset.

Of course, you have now realized that the organ carrier corresponds to an organ of a holding company. And the tax conditions that arise for a holding company by forming an organ are also more than clear. It is therefore possible for subsidiaries of a holding company to offset their profits and losses. However, this is only possible in a very formal indirect way, which requires the observance of several conditions. Thus, a minimum period of five years is prescribed for such a profit-tax organization. In addition, the accounting of an organization is significantly more complex than that of an ordinary holding or subsidiary. Nevertheless, the organisation is very efficient in terms of the ability to pool and offset profits and losses in a holding company. Therefore, we often advise on the organization and discuss with our clients whether such a corporate structure can be worthwhile, at least temporarily.