Actual implementation of the profit and loss transfer agreement in the German fiscal unity

Requirements for a fiscal unity for income tax purposes

The profit and loss transfer agreement under Sect. 14(1) sent. 1 no. 3 of the Corporate Income Tax Act is at the heart of the German income tax group, which has an impact on corporate income tax (Sect. 14, 17 of the Corporate Income Tax Act) and trade tax (Sect. 2(2) sent. 2 of the Trade Tax Act). According to the wording of the law, it is only possible in "cases of subordination," as the parent company must hold an uninterrupted stake in the subsidiary from the beginning of its fiscal year to such an extent that it is entitled to the majority of voting rights from the shares in the subsidiary (“financial integration” pursuant to Sect. 14(1) sent. 1 no. 1 of the Corporate Income Tax Act; Judgement of the Federal Tax Court dated August 9, 2023, file number I R 50/20, Federal Tax Gazette II 2024, p. 131). Under the profit and loss transfer agreement within the meaning of Sect. 291(1) of the Stock Corporation Act (“Aktiengesetz”), the financially integrated subsidiary must undertake to transfer its entire profit to a single other commercial enterprise (parent company) (Sect. 14(1) sent. 1 of the Corporate Income Tax Act). For legal forms other than “SE”, “AG”, and “KGaA”, Sect. 17(1) of the Corporate Income Tax Act contains corresponding requirements.

In addition, there are further criteria for a fiscal unity, in particular requirements for the subsidiary (most recently litigated with regard to existing atypical silent partnerships, Judgement of the Federal Tax Court dated December 11, 2024, file number I R 33/22, Federal Tax Gazette II 2025, p. 1005) and the controlling company (most recently litigated with regard to the trading activity of a partnership as the controlling company, Judgement of the Federal Tax Court dated November 27, 2024, file number I R 23/21). In contrast to the implementation of the profit and loss transfer agreement, these are, according to the case law of the Federal Tax Court, partially "suspendable": The Federal Tax Court has expressly ruled this to be the case for the "financial integration" of Sect. 14(1) sent. 1 no. 1 of the Corporate Income Tax Act (Judgement of the Federal Tax Court dated May 10, 2017, file number I R 51/15). Furthermore, the trading activity of a parent partnership does not have to exist at the beginning of the fiscal year of the subsidiary, but can commence during the first fiscal year (Judgement of the Federal Tax Court dated July 24, 2013, file number I R 40/12, Federal Tax Gazette II 2014, p. 272).

If the criteria of Sect. 14 and 17 of the Corporate Income Tax Act are violated, the fiscal unity will be invalidated. In the case of "interruptible" criteria, only the years of the violation are affected, whereas in the case of a violation of the conditions regarding the profit and loss transfer agreement and its actual implementation, the "first five years" of the fiscal unity as a whole are "at risk" (e.g. Judgement of the Federal Tax Court dated November 2, 2022, file number I R 37/19). In the case of a failed fiscal unity, "profit transfers actually carried out on the basis of a profit transfer agreement are to be classified as hidden profit distributions" (Judgement of the Federal Tax Court dated December 11, 2024, file number I R 17/21, Federal Tax Gazette II 2025, p. 1009, margin no. 45).

Actual implementation of the profit and loss transfer agreement 

The actual implementation of the profit and loss transfer agreement within the meaning of Sect. 14(3) sent. 1 no. 3 sent. 1 of the Corporate Income Tax Act is therefore of enormous importance for the "success" of a fiscal unity. In view of the significance of this criterion, the legislature has laid down requirements for this in sent. 4 et seq. of the provision. In the "Act to Amend and Simplify Corporate Taxation and Tax Law on Travel Expenses" from 2013 (colloquially known as the "small fiscal unity reform"), accounting errors were excluded from the harmfulness to the group under strict conditions with a fictitious implementation.

In other regards, the actual implementation of the profit and loss transfer agreement must be assessed by the tax courts. In its ruling of November 2, 2022 (file number I R 37/19), the Federal Tax Court specified the requirements: According to this ruling, the actual implementation of the profit and loss transfer agreement does not only refer to the final settlement of all claims and liabilities resulting from the profit transfer agreement. The corresponding claims and liabilities must also be recorded in the annual financial statements. The background to the generally strict requirements of the Federal Tax Court`s case law is the idea that the legislature pursues the goal of preventing "manipulation" within the fiscal unity: The fiscal unity should not be able to be established or terminated on a case-by-case basis for the purpose of arbitrarily influencing taxation and shifting income (Judgement of the Federal Tax Court dated May 10, 2017, file number I R 19/15, Federal Tax Gazette II 2019, p. 81, margin no. 9).

In its new ruling of November 5, 2025 (file number I R 37/22), the Federal Tax Court has now further specified these requirements: On the one hand, the question of how exactly the profit transfer obligation is to be reported on the balance sheet is relevant. A cumulative disclosure of these liabilities to the shareholder should be sufficient here (margin no. 17). However, the question remains as to the timing of the implementation. The Federal Tax Court maintains its position that simply posting the claim without fulfilling it is not sufficient (margin number 19). On the other hand, fulfillment within twelve months of the due date should be sufficient (margin number 24), which was clearly not the case with the plaintiff.

Advantages of fiscal unities

Income tax groups (Sect. 14, 17 of the Corporate Income Tax Act, Sect. 2(2) sent. 2 of the Trade Tax Act) break with the principle of German income tax law that "every corporation must be taxed on the basis of its own taxable characteristics" and that there is no "group taxation law that transcends the tax subject" ("separation theory"; Judgement of the Federal Tax Court dated March 3, 2010, file number I R 68/09, margin no. 19). This makes it possible, for example, to prevent the emergence of "stranded losses" within the group: Without a fiscal unity, losses are simply carried back – limited in terms of time and amount – (for corporation tax, Sect. 10d(1) of the Income Tax Act) or, in the case of corporation and trade tax, carried forward subject to the conditions of "minimum taxation" (Sect. 10d(2) of the Income Tax Act, Sect. 10a of the Trade Tax Act). In any case, their use always depends on the profits at the level of the legal entity itself. Transfers of shares (Sect. 8c of the Corporate Income Tax Act, Sect. 10a sent. 10 of the Trade Tax Act) or reorgs (Sect. 4(2) sent. 2 of the Reorg Tax Act; Sect. 18(1) sent. 2 of the Reorg Tax Act; Sect. 19(2) of the Reorg Tax Act), on the other hand, are always harmful to the carry-forwards. In this respect, the "attractiveness" of the fiscal unity is obvious whenever the earnings of the group companies develop differently.

In addition, the attribution of profits or trade income under Sect. 14(1) sent. 1 of the Corporate Income Tax Act and Sect. 2(2) sent. 2 of the Trade Tax Act avoids the problem of the 5 %-tax under Sect. 8b(5) sent. 1 of the Corporate Income Tax Act (in conjunction with Sect. 9 No. 2a sent. 4 of the Trade Tax Act): Only distributions of pre-group profits are subject to this "group penalty tax," but not the profit allocations (during the lifetime of the fiscal unity) themselves.