German corporate tax law basically follows the tax subject principle. Accordingly, each company is taxed individually – i.e. without regard to a group group. There is therefore no automatic calculation of results within the group. This principle is breached by the organisational arrangements.

1.Different rules of organisation

1.1. Organization regulations at a glance

Different organizing regulations are provided for in Germany. There is an organization for income tax purposes. This is regulated in §§ 14-19 KStG and further in § 2 paragraph 2 sentence 2 GewStG. There is also a VAT-based body. Rules for this can be found in § 2 paragraph 2 number 2 UStG. Also for the purposes of real estate transfer tax there are provisions in § 6a GrEStG as well as § 1 paragraph 3, paragraph 4 GrEStG that take the group group into account. The organisational arrangements are limited to these areas of law and therefore do not play a role in other types of tax.

1.2. No uniform definition

However, the problem is that there is no one organization in German tax law. Rather, the rules set out different conditions based on the type of tax that must be met in order for an organisation to exist. A uniform definition therefore does not exist. There is only one guiding principle of an institution based on the different tax regulations. Accordingly, companies in superiority/subordination are considered as organs. However, this mission statement is “blurred” over time. Today, virtual, management-oriented structures exist on a regular basis, regardless of legal and territorial boundaries.

2. organizing regulations for income tax purposes

2.1. Prerequisites

The organizing regulations for income tax purposes are found in §§ 14-19 KStG, §§ 2 (2) sentence 2, 7a GewStG. The central feature of these organising rules is that the association of undertakings must be founded on a contractual basis. It requires direct or indirect financial integration and a profit transfer agreement concluded for at least five years. The tax profit transfer agreement is independent of civil law regulations. There are some special features for tax purposes.

2.2 Legal consequences

The results of the companies recruited into the organ circle are added together. The positive or negative income of the organ company is attributable to the organ carrier. The consequence of this is a direct set-off of losses between the organ company and the organ carrier in the event of losses incurred by the organ company. If, on the other hand, the organ company achieves profits, the 5 % burden regulated in § 8b (5) sentence 1 KStG can be avoided by non-deductible operating expenses for the organ carrier subject to corporate tax, since profits are automatically offset.

A partnership can also be organ carrier. You will then be credited with the income of a corporation. As a result, an original corporate tax entity is now subject to income tax in whole or in part. The income tax organization therefore serves essentially the purpose of the use of losses, financing and profit transfer. On the other hand, there is no capital consolidation or debt consolidation.

Under business tax, the organ company is considered to be the permanent establishment of the organ carrier. The personal business tax liability of the organ company is attributed to the organ carrier for the duration of the organ. In the case of corporation tax, on the other hand, the organ company remains an independent corporation tax entity. Consequently, corporate tax and business tax bodies have different legal consequences.

3. organizing regulations for VAT

3.1. Requirements

The organizational regulations in VAT law (§ 2 paragraph 2 no. 2 UStG) are determined by EU law. The VAT system directive stipulates that national VAT schemes must provide for the possibility of forming a body. The national requirement is that the organ companies are financially, economically and organisationally integrated into the organ carrier’s company according to the overall picture of the actual circumstances. There is no right to apply. Rather, the formation of an organ body when the prerequisites are fulfilled is compulsory.

3.2. Legal consequence

If the conditions for the formation of a VAT-related company are met, the initial and initial sales of the company shall be attributed to the company responsible. Only the organ bearer is the taxable person and the person liable for VAT. The reason for this is that although the organ company remains legally independent, it becomes part of the organ carrier for VAT purposes. Therefore, domestic sales in the VAT group are also tax-free.

These legal consequences resulted in administrative relief for the VAT group, since only one company is taxable and therefore only has to submit advance VAT declarations. It is significantly criticised that companies that are not (fully) entitled to deduct input tax due to the tax exemption of domestic sales can have tax advantages over individual VAT companies.

4th Real Estate Transfer Tax Organization Schemes

4.1. Requirements

The real estate transfer tax regulations have a completely different objective than the above discussed regulations. Under the real estate transfer tax, the organisation has a tax-generating effect. The aim is to capture so-called real estate tax avoiding share deals. In these share deals, real estate is acquired indirectly by shareholder association in order to avoid real estate transfer tax. These are covered by § 1 (3) GrEStG by the real estate transfer tax if at least 90 % of the shares in a real estate-owning company are combined in one hand.

So there must be a qualified share association. This qualifying share association exists, on the one hand, when the shares are combined with an acquirer. On the other hand, it also exists if the shares are in the hands of dominant and dependent companies or only in the hands of dependent companies. In this respect, § 1 (4) no. 2 GrEStG defines the concept of a dependent company by assigning the company to a real estate transfer tax organization. Accordingly, legal persons who are incorporated financially, economically and organisationally into a company according to the overall picture of the actual situation are considered to be dependent. However, the legislator does not describe this legal figure as a real estate transfer tax organization.

There is no legal entity-related domestic restriction. Whether a controlling or dependent company is resident in Germany or abroad is therefore irrelevant for the real estate transfer tax relevant shareholder association. The only decisive factor is that the property is located domestically. Therefore, the real estate transfer tax organization can also apply to foreign corporate matters.

4.2. Legal consequence

Significant difference to the above-mentioned organizational regulations is that the organization has a tax-generating function in the real estate transfer tax law. The legal consequence is that the Organkreis is fabricated as a hand within the meaning of § 1 (3) no. 1 GrEStG. Thus, such a share deal triggers a real estate transfer taxable event. The real estate transfer tax organization is therefore particularly relevant for restructurings in the Group and for company acquisitions with real estate companies. This makes it difficult to make necessary adjustments to business.

Even if a shareholding association does not actually exist for 90 % in one hand due to shares held directly and indirectly due to a lack of uninterrupted shareholding chain, a shareholding association still occurs by fulfilling the integration requirements relevant to real estate transfer tax. The real estate values form the basis of assessment (§ 8 (2) sentence 1 no. 3 GrEStG). The persons liable for payment of the tax shall be those who participate in the shareholder association by way of a joint and several liability mechanism. § 6a GrEStG reduces some tax disadvantages that arise as a result of the regulations on real estate transfer tax organs.

The real estate transfer tax group is not a uniform legal entity regardless of the dependency fiction. It merely fabricates the criterion of a qualifying shareholding in one hand for companies with property transfer tax which are interconnected in a certain way. The individual companies of the organkreis remain each legal entity independent of real estate transfer tax. Also the change in share ratios with existing organs can trigger real estate transfer tax. If the existing shareholding relationships are maintained, the mere establishment of an organizational relationship does not result in a real estate transfer tax event.