Alber, Matthias | Beck's tax and accounting law lexicon Edition 59 C. H. Beck-Verlag

Arendt, Hendrik

Faber, Charlotte

(and 15 more)

Brandis, Peter | Income Tax Law Volume 2 as of May 2022 Publishing house Franz Vahlen Munich

Heuermann, Bernd

Emmerich, Volker | Aktien- und GmbH Group law 10. Edition 2022 C. H. Beck-Verlag

Habersack, Mathias

Goette, Wulf | Munich Commentary on the Stock Corporation Act Volume 5 C. H. Beck-Verlag

Habersack, Mathias

Kalss, Susanne

Gosch, Dietmar | Corporate Tax Act 4th edition 2020 C. H. Beck-Verlag

Gössling, Thomas | Group Structures in the SME sector August 2018 issue Roedl & Partner

Grashoff, Dietrich | Current Tax Law 2012 8. Edition 2012 C. H. Beck-Verlag

Kleinmanns, Florian

Kahle, Holger | Beck's Handbook of Partnerships 5th Edition 2020 C. H. Beck-Verlag

Prince, Ulrich

Prinz, Ulrich | Beck's Handbook of the GmbH 6. Edition 2021 C. H. Beck-Verlag

Winkeljohann, Norbert

Schaub, Bernhard | Münchener Anwalts Handbuch Aktienrecht 3rd edition 2018 C. H. Beck-Verlag

Schüppen, Matthias

A corporate tax body is a corporate structure in which a company enters into a close tax relationship with the companies it controls. Thus, the controlling organ carrier is credited with all profits and losses of the organ companies associated with it. The framework for this is created by a profit and loss transfer agreement that is concluded between the organ carrier and the organ company for this purpose. If the organ company actually incurred losses, the organ carrier is obliged to compensate. These two aspects alone illustrate the potential for detailed tax issues a corporate tax organization has to deal with.

Because of the abbreviations used, reference is made to: Kirchner, Hildebert, Abbreviation List of Legal Language, Berlin 10. Condition 2021

A corporation is in principle to be treated as an independent tax subject both under civil and tax law.

The regulations governing the taxation of corporations are reflected in the Corporate Tax Act. The law offers a conversion to an organ body.

A core area of German corporate and corporate tax law is the tax organization. In this body, several legally independent, but economically dependent corporations, which have a tax-recognized subordination to a higher-ranking company, are treated as a single tax entity.

§ 14 KStG refers to the named subordinate company as organ company, while the higher-ranking company is named organ carrier.

In combination, organ carriers and organ society form the so-called organ circle.

This housework deals with the elaboration of the tax advantages and risks of the corporate tax organization. A consideration of the trade tax and sales tax organization is not represented in this housework.

At the beginning of this work, a systematic presentation of the requirements to be met for establishing an organizational relationship takes place. First the personal requirements are set out and in the second step the factual requirements are clarified.

After explaining the personal and factual requirements, this work will deal with the tax advantages and risks and evaluate them in detail.

Finally, the benefits and risks are weighed and summarized in one conclusion.

In tax law, there is an organization in income tax law, i.e. KStG and GewStG and in the UStG. This housework focuses on income tax law.

The legal concept of an organisation means the tax incorporation of a legally independent legal person into another company. [1]

In the case of an organisation, at least two independent companies are combined into a taxable entity, the independence of the companies remaining legally valid. The subordinate organ company must be traded and “controlled” as a capital company.

In principle, the corporate income tax OG is not a permanent establishment, but rather an independent company which is subject to unlimited tax under § 1 KStG and is therefore subject to an annual assessment of corporate income tax. [] 2]

Due to the profit transfer agreement to be concluded, the taxes of the organ company are only incurred when the organ carrier is taxed.

In order for a corporate tax organization to exist, the prerequisites, which are particularly relevant for corporate taxation, must be met. §§ 14 – 19 KStG result, are present and fulfilled. [3] Basically, a distinction is made between the personal and factual prerequisites. In the case of personal requirements, the conditions are formulated for the participants of the body, while in the case of material requirements the characteristics to be fulfilled are determined between OG and OT.

2.1.1 Qualification of organ carriers

According to § 14 S. 1 KStG, the organ carrier can only be a domestic commercial enterprise, it being sufficient if the management is located in Germany. [] 4]

The legal form must be a limited liability company or a legal entity referred to in § 1 KStG, a commercial partnership or a sole proprietor. [] 5]

2.1.1.1. Commercial enterprise

The organ carrier must operate a commercial enterprise. The requirements to be fulfilled are contained in § 2 GewStG.[6] It is sufficient if a business enterprise exists by legal form.

In constant jurisprudence, the financial administration and the BFH disagree. According to the tax administration, the commercial enterprise must exist from the beginning of the WJ of the organ company. [7] While BFH, according to its case law, interprets that only a commercial enterprise must exist at the time of the profit transfer, since the annual profit is transferred only at the end of the financial year and can thus be reclassified into the underlying income. [] 8]

The tax term “commercial enterprise” must be distinguished according to the legal form of the institution.

2.1.1.2. OT is a natural person

A natural person is suitable as organ carrier, if this according to § 2 GewStG as a sole trader original commercial income acc. § 15 Abs. 2 EStG achieved or co-entrepreneurs i. S. d. § 15 para. 1 no. 2 is EStG.[9] Conversely, the natural person thus obtains profit income from income from agriculture and forestry acc. § 13 EStG or income from independent work acc. § 18 EStG, this is unfit and excluded as organ carrier.

2.1.1.3. OT is a partnership

Similar to the natural persons, also applies to the partnership acc. § 14 Abs. 1 Nr. 2 S. 2 KStG, that these are only qualified as organ carriers if they themselves are originally commercially active acc. § 15 Abs. 1 p. 1 no. 1 EStG.[10]

The national reference of § 14 para 1 no. 2 p. 4-7 KStG applies accordingly. A company established by § 15 Abs. 3 No. 2 EStG is only commercially minted, is not considered as OT.

2.1.1.4. OT is a corporation

If the organ carrier is neither a natural person nor a partnership, neither a legal person qualifies for the formation of a organ carrier in accordance with § 1 KStG. This must be a non-exempt corporation, association or asset and the management must be located in the country. [] 11]

2.1.1.5. OT is a foreign company

If an organ company undertakes to transfer all its profits to a foreign company, the requirements of § 18 KStG must be met in order for foreign commercial companies to be organ carriers. On the one hand, they must have a branch registered in the commercial register, which holds the necessary shares in the BV and the profit transfer agreement must be concluded with the branch of the company. [] 12]

2.1.2 Qualification of organ company

The so-called organ company must be an AG or a KGaA acc. § 14 para 1 S. 1 KStG. § 17 KStG extends the scope of application to any other corporation in the sense of § 1 para. 1 No. 1 KStG, so that in addition a UG, a GmbH or a SE acc. 17 KStG in question. Other corporations, such as cooperatives, are excluded, as are hybrid forms of company. In the case of other corporations, grds. must also have the place of management as well as the registered office in Germany. [13] This is called the so-called double domestic reference.

It is important that a pre-establishment company of a corporation cannot be an organ company, since it is a partnership. The pre-company company, on the other hand, has legal effect as an organ company, since it is largely identical to the completed capital company.

In addition to the personal requirements, which relate to the legal form and the location of the organ carriers and organ company, for the establishment of an organ company acc. § 14 Abs. 1 S. 1 No. 1 KStG also the material requirements are observed. Therefore, financial integration and a profit transfer agreement are absolutely necessary.

2.2.1. Financial inclusion

Due to the StSenkG of 23.10.2000, financial integration is the only integration requirement for the corporate tax organization and thus differs fundamentally from the sales tax organization, since economic and organizational integration is still necessary there. [] 14]

according to § 14 para. 1 S. 1 No. 1 KStG is a so-called financial integration, i.e., if the organ carrier is so involved in the organ company from the beginning of the marketing year that he is entitled to the majority of the voting rights in the organ.

The law is fuzzy, because it is not enough any majority. Rather, the body owner must hold the majority of votes, so that he is allowed to enforce his will in a shareholders' meeting. [] 15)

A simple majority of votes is sufficient if there are no special provisions in the statutes and in the social contract acc. § 16 Abs. 3 AktG or § 47 Abs. 1 GmbHG, i.e. he must have at least one vote more than half of the total number of votes. [] 16]

pursuant to § 14 para. 1 p. 1 no. 1 p. 2 KStG must also be attributed to the indirect participation of financial inclusion, which can also achieve a majority vote. [] 17)

2.2.2. Profit transfer agreement

A further criterion to be fulfilled, which must be present in addition to the personal requirements and the financial integration, is in accordance with § 14 para. 1 S. 1 KStG of the so-called profit transfer agreement.

The profit and loss transfer agreement is regulated in § 291 AktG among two other types of company contracts. The profit transfer agreement under company law changes the legal structure of the company and therefore contains special safeguards and is only recognised for tax purposes if it is effective under civil law. [18] In addition to the profit transfer agreement acc. § 291 AktG, which applies to an SE, AG or KGaA, there is still the profit transfer agreement for an organization with a different legal form according to § 17 KStG.

The contract must include that the company is obliged to transfer all its profits to the other part of the contract acc. § 291 para 1 p. 1 and 2 AktG. Furthermore, this must contain the provisions on the obligation of the ruling company to pay compensation and thus includes the obligation to assume losses and severance pay acc. § 302 and 305 Abs. 5 S. 2 AktG.[20]

In order for the profit and loss transfer agreement to be effective in the case of public limited liability companies, the approval of a 3/4 majority of their principal or executive directors is required. Shareholders' meeting, a notarized notarization and an entry in the commercial register of the organ carrier.[21] In the case of the GmbH, the commercial claims do not differ, so that in this case, too, the profit transfer agreement must be concluded in writing and the shareholders must approve the contract with a 3⁄4 majority in a notarized resolution, which must also be entered in the commercial register. Only in the case of an organ company in the legal form of the GmbH or UG the limitation of the profit transfer acc. Section 301 AktG is not explicitly included in the profit transfer agreement. [] 22]

The “whole profit” mentioned in the law is an indeterminate legal concept. The profit that is meant is the balance sheet profit that would result if no profit transfer agreement existed.[23] Thus, no profit statement appears in the commercial balance of the obligated company, this is rather shown in a preliminary balance. The annual net profit of the pre-balance sheet is recorded in the final trade balance on the liabilities side of the balance sheet as a liability to affiliates. [] 24]

Since the profit transfer agreement from § 291 AktG applies only to the AG, KGaA and the SE, the legislature has also formulated the possibility of a profit transfer agreement for the GmbH and UG in § 17 KStG. § 17 KStG provides only in addition that the contract is only recognized for tax purposes if § 301 and § 302 AktG are also observed in the contract. [] 25]

In addition to the conclusion of the GAV, the actual implementation acc. R 14.5, par. 5 KStH is required.

In order to be able to determine the income of the organization, one must observe § 15 KStG. It lays down rules to be applied, excluded or directed.

For example, § 15 S. 1 No. 1 KStG states that loss deduction restrictions at the organ company, such as § 10d EStG, are not applicable. [26] No 2 deals with the distribution of profits and profits from the sale of shareholdings at organ company level. Point 3 lays down the special arrangements for the interest-rate barrier and considers them as a single entity, so that the organ carriers and the organ company are considered to be one undertaking within the meaning of the interest-rate barrier regulation.[27] The subject of points 4 and 5 is still the conduct of permanent losses in the loss accounts.

The income of the organ company and the individual organ carriers is determined in accordance with the generally applicable rules of the EStG and the KStG, taking into account the above-mentioned peculiarities. [] 28]

The following scheme is used:

In the first step, the annual profit according to the trade balance, which is usually 0 EUR, forms the basis. The annual profits are added to the organ carriers and the losses borne by the organ carrier are subtracted.

The profit corrections according to § 60 para. 2 EStDV added or, if applicable, deducted. The profit transfers anticipated during the year are added to the income calculation and the hidden deposits are deducted from the income.

Finally, non-deductible operating expenses and donations are added to form a subtotal and tax-free capital increases are subtracted.

From the subtotal, the deductible donations acc. § 9 KStG and the income attributable to the organ carrier deducted, so that the organ company’s own income is generally EUR 0.

Both the organ carrier and the organ company have to submit their own KSt declaration on the basis of the respective accounting data. It is only now that the benefits and risks of an existing body come to light.

If the personal and factual prerequisites of the organization are available and the organ carriers independently determine his income and count this income to the organization, it is now necessary to explain and work out what advantages but also risks the formation of an organization entail.

If a loss occurs at the end of the marketing year in the preparation of the trade balance at the level of the organ company, this allows a loss compensation at the level of the organ carrier.[29] This offsetting of earnings would not be possible under individual assessment and is therefore an important organic benefit, since it enables the achievable liquidity and interest effects from the upstream loss account. [30] If the losses exceed the positive income of the organ carrier, according to § 10 d para. 1 EStG a loss transfer up to an amount of EUR 1 million possible. [31]

Furthermore, in the profit and loss transfer agreement, the sponsor of the organ company may also undertake to compensate for the pre-contractual losses of the organ company through deposits. [32] Loss compensation is the most important advantage of organ ownership in the organ circle. The above-mentioned § 10 d EStG allows corporations only to offset losses across periods and not one within the same period. [33]

Assuming that the organ company makes a profit, it would first have to self-tax and retain the profits on the individual investment. The dividend is subject to 60% income tax at the top unit level and 5% corporate tax, depending on the legal form.[34]

If, in return, an organization exists, the actual profit transfer is not taxable analogously to a withdrawal and the taxation of income is solely the organ carrier, i.e. the dividend and thus the 5% are not taxed. Therefore, the capital gains tax does not apply.

If the organ carrier is a partnership, the positive advantage is based on the personal income tax rate. You tax the 60% gross dividend according to § 3c Abs. 2 EStG with the personal tax rate, instead of the 100% profit, if there is no organ and thus usually has a more favorable tax burden.[36] By circumventing the double loading with KSt on the one hand and ESt according to the part income method, one reduces in the organs since the VZ 2009

its total tax burden of 2.5%.[37]

If the top unit (carrier) achieves losses, the limitations of the loss and expense account can be completely avoided and offsets the losses of the carrier with the profits of the company. [] 38]

In order for the tax advantages of the corporate tax authorities to be granted, it is necessary to avoid the “stumbling blocks” listed below in order, in the worst case, to avoid an ineffectiveness of the body.

An existing risk is that the profit transfer agreement is declared invalid and thus the body is dissolved.

The profit transfer agreement is only valid under tax law if it meets the minimum contract term. This is five years.[39] The BFH proceeds from the so-called “time years”, i.e. 60 months. [40]

The minimum duration must be respected. A harmless early termination is only possible if there is an important reason, otherwise it is a harmful termination. [] 41

Important reasons are, inter alia, the sale of the organ participation, the transfer of the organ participation by the organ carrier, the merger or division of the organ company or the liquidation of the organ company or organ carriers.

The legal consequence of a harmful termination is that the organization is not recognised under tax law and retroactively all profit transfers are qualified as hidden profit distributions and thus result in a high tax burden.[42] The decisions can be made in accordance with § 175 Abs. 1 no. 2 AO are subsequently amended.

Another obligation arising from the profit and loss transfer agreement is the obligation to assume losses. This means that the organ carrier during the contract period acc. § 302 AktG must compensate for any annual deficit on the cut-off date of the annual balance sheet.[43] In doing so, the shortfalls of the organization may not be accompanied by capital reserves in accordance with § 272 para. 2 No. 4 HGB, since otherwise an organship not recognized. [] 44

Every merchant ag. § 1 HGB is obliged to keep books according to § 238 HGB. The companies that come into consideration as organ carriers and as organ companies are commercial companies that comply with § 6 Abs. 1 HGB as a form merchant are also obliged to bookkeeping.[45] For this reason, the organization remains a tax subject and must therefore keep records and books and comply with the annual tax return obligation. Since the body is a legal person, it is also obliged to provide accounts and therefore has to draw up a balance sheet.

Through the profit transfer agreement, the organ carriers undertake to compensate losses of the organ company. As mentioned above in point 2.1.2., the organ company is either an AG or GmbH, which is subject to limited liability. With commercial and tax recognition and validity of the profit transfer agreement, the organ companies extend their limited liability and have to pay for the annual deficit of the organ carrier. [] 46]

In the determination of profit, there may be a deviation between commercial profit transfer and tax profit. Reductions result from non-deductible operating expenses or tax-free income recognised for tax purposes as part of an off-balance sheet adjustment. [47] An overpayment exists if the commercial loss assumption is smaller than the loss resulting from the tax balance. [] 48]

If the excess or reductions are not recognized, there is a risk of double or non-taxation.

Excess or reductions occur when the organ company’s marketing year ends. Excess transfers then represent profit distributions that are subject to corporate tax. Reductions are qualified as contributions of the organ company to the organ carrier and lead to an increase in corporate tax on the organ carrier. [] 49]

If one meets the personal and factual requirements for the establishment of a body in relation to the qualifications of the body owner and the body company, while complying with the financial integration and concluding a profit transfer agreement, one can finally state that the body is already an interesting tax design tool for smaller groups of companies. However, in the area of setting up an organ, it is important to avoid the listed risks, which in the worst case lead to ineffectiveness of the organ. For example, the implementation and contractual design definitely require the help of a specialist lawyer and notary. The record-keeping obligations in accounting and preparation of the trade balance also poses hurdles that can be avoided with a tax advisor.

A significant risk associated with an organ is extended liability. This means that a significant advantage of a corporation is lost and, in the worst case, can lead to financial consequences.

Despite the bureaucratic and implementable prerequisites, the organization can lead to a tax structure in individual cases after a holistic consideration of the aspects and is quite "attractive". Because by immediately offsetting losses of the organ company with profits of the organ carrier and vice versa, a corresponding reduction of the income or corporate tax burden is achieved.

[1] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 1.

[2] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 1.

[3] Vogt, in: Beck ́sches Handbuch der GmbH, §21, paragraph 78.

[4] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 3.

[5] Edgar/Leicht, in: Beck's tax and balance sheet lexicon, Organschaft, paragraph 3.

[6] Vogt, in: Beck ́sches Handbuch der GmbH, §21, paragraph 83.

[7] BMF 10. 11. 2005, BStBl. I 2005, 1038, Tz 21.

[8] BFH 24. 2013, DStR 2013, 1939.

[9] Neumann, in: KStG, §14, paragraph 106.

[10] Neumann, in: KStG, §14, paragraph 108.

[11] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 5.

[12] Krumm, in: Income Tax Law, § 18, paragraph 1.

[13] Group structures in medium-sized enterprises

[14] Krumm, in: Income Tax Law, § 14, paragraph 80.

[15] Krumm, in: Income Tax Law, § 14, paragraph 81.

[16] Krumm, in: Income Tax Law, § 14, paragraph 81.

[17] Keller v Otto, in: Beck’s Handbook of the PersG, § 24, paragraph 95.

[18] Altmeppen, in: MüKo AktG, § 291, paragraph 1.

[19] Altmeppen, in: MüKo AktG, § 291, paragraph 141.

[20] Altmeppen, in: MüKo AktG, § 291, paragraph 144.

[21] Edgar/Leicht, in: Beck's tax and balance sheet lexicon, EAV, paragraph 2.

[22] BMF of 14.1.2010, IV C 2 – S 2770

[23] Altmeppen, in: MüKo AktG, § 291, paragraph 145.

[24] Emmerich, in: Aktien- und GmbH group law, § 291, paragraph 88.

[25] Emmerich, in: Aktien- und GmbH group law, § 291, paragraph 91.

[26] Krumm, in: Income tax law, § 15, paragraph 1.

[27] Krumm, in: Income tax law, § 15, paragraph 1.

[28] Witt, in: MüKo on balance sheet law, § 271, paragraph 35.

[29] Schloss, in: Münchener Anwaltshandbuch Aktienrecht, § 54, paragraph 172.

[30] Schloss, in: Münchener Anwaltshandbuch Aktienrecht, § 54, paragraph 172.

[31] Schloss, in: Münchener Anwaltshandbuch Aktienrecht, § 54, paragraph 172.

[32] Schloss, in: Münchener Anwaltshandbuch Aktienrecht, § 54, paragraph 174.

[33] Group structures in medium-sized enterprises

[34] Group structures in medium-sized enterprises

[35] Group structures in medium-sized enterprises

[36] Group structures in medium-sized enterprises

[37] Grasshoff, in: StR, paragraph 305.

[38] Group structures in medium-sized enterprises

[39] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, EAV, paragraph 4.

[40] BFH 28.11.2007 – I R 94/06, DB 2008, 1413

[41] BFH 15.9.2010 – I B 27/10, BStBl. II 2010, 935

[42] Edgar/Leicht, in: Beck's tax and balance sheet lexicon, EAV, paragraph 4.

[43] Edgar/Leicht, in: Beck's tax and balance sheet lexicon, EAV, paragraph 5.

[45] Graf, in: MüKo on accounting law, § 238, paragraph 6.

[46] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 31.

[47] Edgar/Leicht, in: Beck's tax and balance sheet lexicon, Organschaft, paragraph 31.

[48] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 31.

[49] Edgar/Leicht, in: Beck ́sches Steuer- und Bilanzlexikon, Organschaft, paragraph 31.