Federal Fiscal Court ruling: Federal Fiscal Court on financial integration in tax groups

Financial integration where qualified majorities are required

Under section 2(2) no. 2 sentence 1 of the VAT Act [Umsatzsteuergesetz–UStG], a commercial or professional activity is not carried on independently if, according to the overall picture of the actual circumstances, a legal person is financially, economically and organisationally integrated into the business of the controlling company (under EU law: Art. 11 of the VAT Directive [Mehrwertsteuersystemrichtlinie–MwStSystRL]). For financial integration, the Federal Fiscal Court previously required a majority of the voting rights, provided that no higher qualified majority was required for resolutions in the controlled company. A blocking minority was not sufficient (Federal Fiscal Court judgement of 15 Dec 2016, file ref. V R 14/16, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2017, p. 600, para. 29; Federal Fiscal Court judgement of 8 Aug 2013, file ref. V R 18/13, Federal Tax Gazette II 2017, p. 543, para. 29). This is also the position taken in section 2.8(5) sentence 2 of the VAT Application Circular [Umsatzsteuer-Anwendungserlass–UStAE].

Following the judgement of the European Court of Justice [Europäischer Gerichtshof–EuGH] in Norddeutsche Gesellschaft für Diakonie (European Court of Justice judgement of 1 Dec 2022, file ref. C-141/20), the eleventh chamber of the Federal Fiscal Court changed this case law with the consent of the fifth chamber: financial integration also exists if the shareholder holds only 50% of the voting rights but the majority of the capital and provides the sole managing director of the controlled company (Federal Fiscal Court judgement of 18 Jan 2023, file ref. XI R 29/22 (XI R 16/18), para. 37).

For corporation tax purposes, financial integration has been the only integration requirement since the Tax Reduction Act [Steuersenkungsgesetz–StSenkG] of 23 October 2000: the controlling company must be entitled to the majority of the voting rights attaching to the shares uninterruptedly from the beginning of the controlled company’s financial year (section 14(1) sentence 1 no. 1 of the Corporation Tax Act [Körperschaftsteuergesetz–KStG]; for trade tax, in conjunction with section 2(2) sentence 2 of the Trade Tax Act [Gewerbesteuergesetz–GewStG]). For a long time, the criterion was interpreted uniformly in both areas of law.

In the case at issue, N-GmbH had been the sole shareholder of O-GmbH since the latter’s formation in 2011. It held 40% of the shares under a notarised trust agreement as trustee for a principal [Treugeberin], to whom it had also granted a voting proxy. The articles of association of O-GmbH required a majority of two-thirds of the votes cast for, in principle, all shareholder resolutions. The sole managing director of O-GmbH was P, who was also the sole shareholder and managing director of N-GmbH. O-GmbH was economically integrated through the lease of parts of N-GmbH’s operating building. On 12 October 2012, N-GmbH acquired all rights under the trust agreement.

Following the insolvency of O-GmbH, its insolvency administrator objected to VAT claims being recorded in the schedule of insolvency claims (in the appeal on points of law, only for 2012): as a controlled company, he argued, O-GmbH had not been liable for the tax. The tax office denied financial integration because of the trust agreement. The Munich Fiscal Court [Finanzgericht–FG], by contrast, considered that the financial integration, which was only weaker owing to the lack of a two-thirds majority, was compensated for by the personnel overlap in management (Munich Fiscal Court judgement of 30 Nov 2023, file ref. 14 K 280/21).

VAT group despite the lack of a two-thirds majority

The fifth chamber of the Federal Fiscal Court upholds the lower court on the question of the VAT group, but sets aside the judgement on procedural grounds and refers the case back to the Fiscal Court. The decision contains three core propositions:

• Majority of the capital and management suffice: With 60% of the votes, N-GmbH fell short of the two-thirds majority. Under earlier case law, financial integration would therefore have had to be denied (para. 23). Since the Federal Fiscal Court judgement of 18 Jan 2023, file ref. XI R 29/22 (XI R 16/18), however, it is sufficient for the controlling company to hold the majority of the capital and provide the sole managing director (para. 24). The fifth chamber thus extends the principles developed for parity of voting rights to the case of a missed voting threshold under the articles of association. This reflects the reasoning already set out in XI R 29/22 (para. 37): through the managing director, the controlling company determines the day-to-day management, and the other shareholders cannot resolve on different instructions without it.
• Trust arrangement and change of managing director: Questions of proof regarding the trust agreement do not arise because it was notarised before the company’s formation (section 15(3) of the Limited Liability Companies Act [GmbH-Gesetz–GmbHG]). Without its recognition, N-GmbH would have been the sole shareholder anyway (para. 25). The Federal Fiscal Court rejects the tax office’s objection that N-GmbH could not, for example in the event of P’s death, have appointed a new managing director on its own: this could only cause the VAT group to cease for the period from which a new appointment became necessary (para. 27).
• Symmetry via section 176 of the Fiscal Code [Abgabenordnung–AO]: If the VAT group exists only by virtue of a change in case law, the tax assessment issued to the controlled company may only be set aside if the controlling company applies for the amendment of its own assessment, which can still be amended, and thereby waives the protection of legitimate expectations under section 176(1) sentence 1 no. 3 of the Fiscal Code (paras. 30, 33; confirming Federal Fiscal Court judgement of 5 Sep 2024, file ref. V R 5/23). Whether the parties rely on the change in case law or on the protection of legitimate expectations is irrelevant, because section 176 of the Fiscal Code must be observed ex officio – including in insolvency proceedings (para. 31). The Federal Fiscal Court refuses to extend this to other cases of asymmetric reliance for lack of a legal basis (para. 34).

From 12 October 2012, the VAT group already existed under the previous case law. For the period before that date, the lower Fiscal Court must clarify whether N-GmbH can still file the application under section 172(1) sentence 1 no. 2 (a) of the Fiscal Code, where applicable within the period extended under section 174(3) sentence 2 of the Fiscal Code (para. 36).

Income tax group: a stricter test for financial integration

For corporation tax groups, the first chamber already applied a stricter test in 2023: if the articles of association of the controlled company generally provide for a qualified majority for shareholder resolutions, the controlling company must have a correspondingly qualified majority of the voting rights (Federal Fiscal Court judgement of 9 Aug 2023, file ref. I R 50/20, para. 18). In that case, 79.8% was not sufficient because the articles of association required 91% of the votes present. The legislature, the court held, had deliberately focused on voting rights rather than on shares (para. 19).

The more recent VAT case law, it held, was based on an overall assessment of all three integration criteria and could not be transferred to the legal position for corporation tax (para. 21). Financial integration concerned only the enforcement of the will as to the management of the company in the shareholders’ meeting; actual influence on the management belonged to organisational integration, which is no longer required for income tax purposes (para. 24).

A comparison of tax groups for corporation tax/trade tax purposes and VAT groups reveals the following differences:

• Test: For VAT purposes, a majority of the voting rights is merely the standard case. Where the controlling company holds the majority of the capital, the personnel overlap in management can compensate for a missing (qualified) majority of voting rights. For income tax purposes, only the majority of the voting rights attaching to the shares counts, including generally required voting thresholds. Who provides the management is irrelevant.
• Contractual arrangements: For income tax purposes, voting agreements and voting proxies are generally disregarded unless economic ownership passes with them (I R 50/20, para. 17; Federal Fiscal Court judgement of 10 May 2017, file ref. I R 51/15, Federal Tax Gazette II 2018, p. 30). Shares held in trust are attributable to the principal (section 39(2) no. 1 sentence 2 of the Fiscal Code).
• Timing: A VAT group begins and ends when the integration requirements are met or cease to be met, even during the year. For income tax purposes, financial integration must exist uninterruptedly from the beginning of the controlled company’s financial year. In addition, a profit and loss transfer agreement is required (section 14(1) sentence 1 no. 3 of the Corporation Tax Act).

Applied to the facts of V R 36/24, an income tax group would – irrespective of the other requirements – have failed because of the two-thirds clause until the acquisition of the principal’s rights, since only 60% of the voting rights were attributable to N-GmbH. The question raised after the Federal Fiscal Court judgement in XI R 29/22 of whether the two areas of law are “drifting apart” has been answered by both decisions: the VAT chamber interprets financial integration broadly, the first chamber, for corporation tax (section 14(1) sentence 1 no. 1 of the Corporation Tax Act), narrowly. Because different provisions with different wording are concerned, a referral to the Grand Chamber (section 11(2) of the Code of Procedure of Fiscal Courts [Finanzgerichtsordnung–FGO]) is not to be expected.

The divergence is rooted in the legislation, but it is not free of tension. In favour of the VAT approach is the fact that the European Court of Justice also focuses on the ability to enforce one’s will. At the same time, the boundary with organisational integration becomes blurred when the same personnel overlap supports two criteria. The headnote of the judgement is tailored to the individual case (60% with a two-thirds threshold), but should be transferable to other constellations as long as the other shareholders cannot pass resolutions without the controlling company.

It remains open whether it is sufficient for the controlling company to provide only one of several managing directors. Moreover, the VAT group becomes dependent on individuals: if the managing director drops out and the controlling company cannot appoint a successor on its own, financial integration may cease (para. 27) – possibly without anyone noticing. For a VAT group that arises by operation of law, this means a loss of legal certainty.

Qualified majorities: practical implications for tax groups

The decision broadens the scope of the VAT group. Since, under current law, a VAT group arises by operation of law, it may also come into existence where voting thresholds in the articles of association previously seemed to rule it out, for example in joint ventures or majority shareholdings with minority veto rights. In practice, the following is recommended:

• Reassess for VAT purposes: If a shareholder holds the majority of the capital and provides the sole managing director, a VAT group is likely where economic and organisational integration also exist – with the controlling company liable for the tax of the entire VAT group. It remains to be seen whether the tax authorities will amend section 2.8(5) of the VAT Application Circular.
• Safeguard income tax groups: If the articles of association of the controlled company generally require a qualified majority, the controlling company must hold that majority or the articles must be amended. The amendment only takes effect upon registration in the commercial register (section 54(3) of the Limited Liability Companies Act) and must therefore be effective before the beginning of the financial year for which the tax group is to apply. The Federal Fiscal Court has left open whether voting thresholds that apply only to certain resolutions are harmful. Thresholds for extraordinary resolutions such as amendments to the articles of association or reorganisations should generally not be harmful (I R 50/20, para. 26).
• Monitor management: If the VAT group is based on the new test, it stands or falls with the person of the managing director. Succession arrangements, such as a right of the majority shareholder under the articles of association to appoint the managing director, should be put in place at an early stage.
• Coordinate past periods: If a controlled company or its insolvency administrator relies on the change in case law, this requires a timely application for amendment by the controlling company.

In the medium term, a change of system is emerging: under the government draft of an Annual Tax Act 2026 [Jahressteuergesetz 2026–JStG 2026] (Bundesrat official publication [Bundesratsdrucksache–BR-Drs.] 447/26), section 2(2) no. 2 of the VAT Act is to be replaced by a new section 2c of the VAT Act. A VAT group would then only take effect upon an express declaration by the controlling company, for the first time from 1 January 2030. The draft essentially retains the integration requirements. The principles of V R 36/24 will therefore remain relevant – in future as a prerequisite for a VAT group that has been deliberately declared. Until then, the articles of association of subsidiaries should be reviewed separately for VAT and for income tax purposes.