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The tax treatment of reorganisation-induced additional transfers in the case of a consolidated tax group

It is the view of the fiscal administration that a merger within an existing consolidated tax group structure at fair market values under German commercial law will result in an additional transfer prior to the tax consolidation that will, in turn, be partly taxable as a dividend. By contrast, the legal literature presents a different view. In a recent judgement, the Federal Fiscal Court (Bundesfinanzhof, BFH) has now ruled in favour of the taxpayer.

The tax charge in consolidated tax group cases

Within the scope of corporate acquisitions, in the subsequent period, there is frequently a desire to merge the acquired company into a superordinate company. 

Through the merger, a so-called merger-related loss arises in the amount of the difference between the acquisition costs for the shareholding (for example, €10m) and the acquired company’s equity (for example, €1m). This merger-related loss leads to undesired equity situations since acquisition costs will ultimately be cancelled out. That is why there is frequently a desire to avoid this merger-related loss under German commercial law through the realisation of the hidden reserves. By contrast, for tax purposes, the merger can take place in a tax neutral way and with the rollover of book values.

In practice, it is regularly the case that the acquiring group is structured as a consolidated tax group so that, normally, the acquired company is merged into the parent company. 

The differing amounts stated in the financial accounts and in the tax accounts give rise to additional profit for tax and/or commercial purposes and this leads to a so-called additional transfer. The fiscal administration (Federal Ministry of Finance [Bundesministerium der Finanzen, BMF] circular of 11.11.2001, German Reorganisation Tax Decree, Federal Law Gazette [Bundesgesetzblatt, BGBl] I 2011 - p. 1314 under paragraph Org. 33) is of the opinion that this constitutes a transaction prior to the tax consolidation. As a consequence, this additional transfer is treated as a dividend for tax purposes. In the case of an additional transfer (in the example, €9m) a tax charge in the amount of approx. € 150,000 would thus arise.

A new BFH ruling

The BFH now had to rule on the question of whether such an additional transfer had occurred prior to the tax consolidation, in accordance with the view of the fiscal administration, or whether this constituted an additional transfer within the consolidated tax group, in accordance with the prevailing opinion in the legal literature. Here, the BFH ruled in favour of the taxpayer, in its ruling of 21.2.2022 (case reference: I R 51/19), that, in the case of a merger into an existing consolidated tax group structure, the differences in value that result from this have to be seen against the background of the consolidated tax group on account of the different amounts stated and happens in a tax neutral way. The BFH justified its view by pointing out that in order to make an assessment as to whether there had been an additional transfer prior to the tax consolidation or whether it had occurred within the consolidated tax group, you need to focus on the date of the event that occurred that formed the basis for the difference between the profit transfer in accordance with German commercial law and the net worth increase in the tax accounts. The business transaction that causes a difference to arise between the financial accounts and the tax accounts should be recognised in the accounts for the first time for the period during which the profit and loss transfer agreement had been applicable. Therefore, the BFH treats the additional transfer as if it had been brought about in the consolidated tax group.

Impact on practice

In order to avoid the negative consequences, in practice, structures to sidestep these were frequently chosen that were expensive and associated with an increased amount of additional work. In future, it may be possible to dispense with these. It should be noted that the BFH ruling, which is favourable for the taxpayer, has not yet been published by the fiscal administration and, in this respect, there will still be a residual risk in applying it.

Recommendation: For transactions that have already been realised you should make reference to the recently issued BFH ruling. In the case of transactions where there is still structuring potential, where appropriate, you should possibly defer the merger.

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