date | theme

21. December 2015 | The profit transfer agreement as a prerequisite for the income tax organization

15. July 2017 | Organising at GmbH

25. February 2020 | The organization in income tax law: its structure and its advantages and disadvantages

12. November 2021 | Group taxation in Austria & German bodies in comparison

16. March 2022 | Incorrect profit transfer agreement recognized by the organization § 14 para. 1 S. No. 3 S. 4 KStG

Under the conditions of § 14 (1) no. 3 sentence 4, 5 KStG, an erroneous profit transfer agreement of the organ company to the organ carrier is also recognized. We explain when this is the case, what the recognition entails and what you have to consider afterwards despite the recognition.

Before the regulation of § 14 (1) sentence 1 no. 3 sentence 4 KStG, the actual implementation of the profit transfer agreement was regularly disputed in practice. In particular, in the context of the audit, the auditor tried to make the body fail even in the case of only minor commercial accounting errors. This could cause various disadvantages for the companies, although the mistake was not important. In order to prevent this, a correctness fiction was therefore created for some faulty profit transfer contracts.

The regulation of § 14 (1) sentence 1 no. 3 sentence 4 KStG is based on the fact that an organ company initially miscalculated its profit or loss. Then she wants to pay this erroneously determined profit to the organ carrier or offset the loss. This leads to the fact that the profit transfer agreement also shows an erroneously determined profit or loss. However, a correct profit transfer agreement requires that the correct profit or loss is always transferred in accordance with the trade balance. Consequently, the profit transfer agreement does not comply with the provisions of § 14(1), first sentence, no. 3, first sentence KStG. Therefore, such a defective profit transfer agreement would not be recognised and therefore the profit and loss offsets within the organ circle would not be recognised. Accordingly, you cannot use the advantages of the organ body. The organization would therefore fail.

In this case, the provision of § 14 (1) sentence 1 no. 3 sentence 4 KStG now applies. As a result, a defective profit transfer agreement based on an incorrect balance sheet of the organ company must also be recognised for tax purposes. Thus, the gains and losses within the framework of the institution can be offset.

§ 14 (1) no. 3 sentence 4 KStG is intended to remove obstacles in the recognition of bodies based on an erroneous accounting and thus on an erroneous profit transfer agreement. Therefore, it enables the subsequent healing of an incorrect profit transfer or loss assumption in a later financial statement. Therefore, if the conditions are met, the provision makes it possible to recognise the institution. Thus, if the organ company has paid a profit to the organ carrier, which is based on an annual financial statement that contains erroneous balance sheet estimates, and is therefore the profit transfer agreement according to the basic rule of § 14 para. 1 sentence 1 no. 3 sentence 1 KStG, the fiction leads to a cure of this deficiency with the result that the organship is nevertheless to be recognized.

In § 14 (1) no. 3 sentence 4 KStG, the legislature has therefore introduced a guarantee of accuracy of the profit transfer or loss assumption in the case of organs despite incorrect annual accounts of the financially integrated organs. This should facilitate bodies by allowing them to correct alleged accounting errors in current accounts. However, only accounting errors and no legal errors can be corrected in the drafting of the profit transfer agreement. Therefore, shortcomings due to the fact that the profit transfer agreement is not concluded for at least five years cannot be cured.

In order for the guarantee of correctness to intervene, however, certain conditions must be cumulative.

First, the organ company must have transferred a profit to the organ carrier or compensated a loss. The word “applies” means that there must be a breach of the proper execution of the contract within the meaning of § 14 (1) sentence 1 no. 3 KStG. Therefore, only accounting errors that affect the actual execution of the contract are covered by the requirement. Accordingly, the provision is not applicable if an initially erroneous implementation of the profit transfer agreement with commercial and tax effects has been cured. When a cure occurs we have explained in one of our other contributions.

Since the profit transfer or loss assumption is determined in accordance with the organ company, accounting errors are meant in the annual accounts of the organ company and not the organ carrier. The profit or loss must be based on an erroneous financial statement, but it is effectively established. It must not therefore be null and void. However, nullity can only be considered in exceptional cases.

In addition, the incorrectness of the annual financial statement would not have had to be recognized when it was prepared using the care of a decent merchant. Certain qualified certificates of a tax consultant or auditor contain a guarantee of accuracy and therefore make the proof of careful commercial action unnecessary.

For these mentioned requirements, however, a BMF letter is missing so far. Therefore, the application of this provision is risky for the taxable person.

But despite recognition, they have to consider certain things in the coming year. The error complained about by the tax administration must be corrected by the organ company and the organ carrier in the event of a need for correction in the trade balance sheet at the latest in the next annual accounts after the date of the complaint. The error can therefore be corrected in the current annual accounts or in a previous one. In the case of an organ company, the amount of the transfer of profit or loss, including the corrected error, shall be shown in the corrected annual financial statements. On the other hand, there has been no error at all in accounting for the body carrier. Insofar as the law presupposes the correction of an error in the annual accounts of the organ carrier, only the statement of the changed amount of the profit transfer or loss assumption in the annual accounts of the organ carrier can therefore act.