Phase-aligned recognition of a minority shareholder’s compensation claim from a tax group

Decision by the Munich Fiscal Court

In its decision on 13 March 2025 (file ref. 7 K 2346/21), the Munich Fiscal Court came to the following result regarding minority shareholders who hold their shares as business assets: under section 304 AktG, claims for fixed compensation payments are to be recognised on the balance sheet date of the financial year to which the compensation payment relates, provided that the amount of the compensation payment is determined as of the balance sheet date, has been incurred and is sufficiently secure. The court considered that this applies regardless of the point in time at which the claim arises under civil law, which is typically later. If the controlled company and the minority shareholder have both set the calendar year as their financial year, this is referred to as accrual based recognition/phase-aligned recognition.

Case and balance sheet treatment by X AG 

The claimant was the controlling company of a tax group for corporate income tax, of which X AG was the controlled company. X AG, in turn, held minority interests in several GmbHs, which for their part had set up a tax group for income tax with their respective majority shareholders. The profit and loss transfer agreements laid down that, as a minority shareholder, X AG should receive fixed annual compensation payments, which should become due on or a few days after the approval of the financial statements. X AG recognised its claim to these compensation payments in its tax accounts on the accrual basis/a phase-aligned basis, i.e. already in the financial year of the controlled company in question. Regarding the determination of the income, the receiving minority shareholder declared the compensation payment in accordance with the provisions on the taxation of profit distributions – there was no dispute about this in the case under judgement. However, the tax office’s view was that it was only permitted to recognise the claim in the following year when the financial statements are approved or on the day when the shareholders' meeting of the controlled company is held. The Munich Fiscal Court had to rule on the following questions of law:

• At what point in time are a minority shareholder’s claims for fixed compensation payments under section 304 AktG to be recognized in the tax accounts in the context of a corporate income tax group?
• Is it possible to already recognise these claims on the balance sheet date of the financial year to which the compensation payment relates or is recognition only possible when the claim arises under civil law?

Standards in accounting legislation on capitalisation 

The court based its decision on the general recognition principles found in section 252(1) no. 4 of the Commercial Code (HGB). According to these principles, claims are to be recognised as soon as they are incurred, are sufficiently certain and thus “realised”. These conditions are met if a claim has either already arisen under civil law by the balance sheet date or if the main economic reasons for it being incurred occurred in the past financial year and the entrepreneur can count on the claim arising under civil law in the future. 

In the case in dispute, X AG’s claims to the fixed annual compensation payments had not arisen under civil law by the end of the financial year, but the fiscal court considered that they had been economically incurred and that it was certain to expect that they would arise in that amount. The amount of the fixed compensation payments was certain as of the balance sheet date and did not depend on any future factors. The court further noted that applying the case law on the recognition of dividends in a subsequent period did not come into consideration because the claims for compensation are not predicated on a separate resolution on the appropriation of net profits. 

Practical implications

Taking the general accounting principles into account, the ruling is convincing from a systemic point of view. But it remains unresolved how the claims should be treated if it seems possible for the minority shares to be sold between the balance sheet date and the date of the approval of the financial statements or of the general or shareholders’ meeting, or, alternatively, if there could be a squeeze out, without the minority shareholder being able to intervene. 

From a procedural tax law perspective, the decision, with its years in dispute of 2011 and 2012, is a look back into “old law”. The claimant was the controlling company, which was claiming against a recognition decision made at a controlled company. Only the controlling company was able to take issue with the allocated amount of income by lodging an appeal against its own corporate income tax assessment (e.g. Federal Fiscal Court 28/1/2004 I R 84/03, Federal Tax Gazette [BStBl.] II 2004, 539.) With effect for assessment periods starting from 1 January 2014, section 14(5) of the Corporate Income Tax Act (KStG) stipulates, among other things, that the income of the controlled company attributable to the controlling company is to be assessed separately and uniformly in relation to the controlling company and the controlled company. Both the controlling company and the controlled company are entitled to legal protection against the assessment notice on separate and uniform determination (R 14.6 (6) sentence 2 KStR; BFH 11/7/2023 – I R 21/20, BStBl. II 2024, 413, para. 28).

This decision is of practical significance to all kinds of tax groups in which a fixed compensation payment in favour of the minority shareholder has been agreed. It allows income to be allocated to periods on the accruals basis/a phase-aligned basis, which is appropriate in most cases. A different approach should apply, however, in situations where a variable compensation payment has been agreed. In these cases, the actual amount of the compensation payment usually depends on the dividend distributions made to the controlling company and is therefore not sufficiently fixed as of the balance sheet date. Taxpayers should examine profit and loss transfer agreements to see whether they include clear provisions on due date, amount and arising of the compensation payment, and therefore meet the conditions for accrual-based/phase-aligned recognition laid out above. The fiscal court gave leave to appeal, which has apparently not been filed. The Munich tax authorities had taken a position against accrual-based/phase-aligned recognition of the claim for compensation payment. It cannot be ruled out that tax authorities will continue to reject accrual-based/the phase-aligned recognition (which should typically follow the commercial financial statements), even after the decision by the Munich Fiscal Court. This is also in light of the fact that the question of law decided here is also controversially discussed in the specialist literature. 

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