The corporation tax group: who, under which contract, and from when

A holding GmbH books a loss of 150,000 € for the year, while its subsidiary GmbH earns 400,000 € in the same year. Left alone, the subsidiary pays corporation tax on its full profit and the parent's loss sits unused. With an Organschaft, the tax office adds both results together. The road there is narrow, and even the first year turns on a single date.

What the tax group achieves

Every corporation is liable to corporation tax on its own. That remains true inside a group: parent and subsidiary each file their own return, each receive their own assessment, and each offsets profits and losses only against itself. The Corporation Tax Act has no notion of the group as such.

The Organschaft is the statutory exception to that principle. § 14(1) sentence 1 KStG attributes the controlled company's income to the owner of the business to which it transfers its profit. That owner is called the Organträger, the controlling parent. It is taxed on the other company's income as though it had earned it itself.

In economic terms this means one thing above all: profits and losses of different companies meet in the same year at the same taxpayer. The parent's loss reduces the subsidiary's profit directly, and neither has to wait for a carryforward into later years before the offset takes effect.

The controlled company does not disappear. It remains a taxpayer in its own right, still computes its income itself and still files its own return. Only the result of that computation moves to the parent. The exception in § 16 KStG, under which part of it stays with the subsidiary, is covered in the second module.

This attribution is not an election made year by year. It applies when the statutory conditions are present and lapses when one of them is missing. The legislator therefore wrote the conditions as a numbered list, and every item on that list has to hold on its own.

The structure of the section sets the order of review. First comes the question of who can be the controlled company, then who can be the parent. After that come the shareholding, the contract and its performance. This module covers the first steps, the second module covers performance and consequences.

Who can be the controlled company

The heading of § 14 KStG names the stock corporation and the partnership limited by shares. In its text it also names the European Company. For these three legal forms the provision applies directly, and they are also the source of the contract type it refers to.

Two location tests are added, and they are not the same as for unlimited tax liability. The law requires the place of management in Germany and the registered office in an EU member state or an EEA contracting state. The registered office may therefore be abroad, the management may not.

For small and mid-sized businesses § 17 KStG is the more important rule. It declares §§ 14 to 16 applicable accordingly when another corporation with the same location tests validly undertakes to transfer its entire profit to a business within the meaning of § 14. That is the route for the GmbH.

The reference is not unconditional, though. § 17(1) sentence 2 KStG sets two further requirements for the contract, which for a stock corporation already follow from the Stock Corporation Act and which for a GmbH must be expressly agreed or observed. They concern the ceiling on the transfer and the assumption of losses.

On the wording of both provisions, partnerships cannot be a controlled company. § 14 names three corporations, § 17 speaks of another corporation. A limited partnership can therefore be the controlling parent, as the next section shows, but not the controlled company.

Who can be the controlling parent

§ 14(1) sentence 1 no. 2 KStG lists the possible controlling parents. First come natural persons. Alongside them, corporations, associations of persons and pools of assets qualify, but only if they are not exempt from corporation tax.

The third group is tied to an activity. A partnership within the meaning of § 15(1) sentence 1 no. 2 EStG can be the controlling parent if it carries on a commercial activity itself. The reference to no. 1 requires an activity of its own; being treated as commercial for some other reason is not enough on the wording.

With a partnership, the holding in the controlled company must also belong to the partnership itself. Sentence 3 of no. 2 requires financial integration to be met in relation to the partnership. Shares that its partners hold personally do not count towards it.

• natural persons
• corporations, associations and pools of assets not exempt from tax, in particular a GmbH or an AG
• partnerships that themselves carry on a commercial activity within the meaning of § 15(1) sentence 1 no. 1 EStG
• in every case: the holding in the controlled company is allocated to a domestic permanent establishment throughout the tax group

The last line of the list is the strictest. Under sentence 4 of no. 2, the holding in the controlled company must be allocated without interruption, for the whole duration of the group, to a domestic permanent establishment of the parent within the meaning of § 12 AO. With an indirect holding, this applies to the intermediate company.

Consistently, sentence 6 attributes the controlled company's income to exactly that permanent establishment. And sentence 7 closes a loophole: a domestic permanent establishment exists only if its income is taxed in Germany both under domestic law and under an applicable double taxation agreement.

One more condition is hidden in the opening sentence. The profit must be transferred to one single other commercial business. A subsidiary therefore cannot split its profit between two parents, and the recipient must run a business, not merely hold assets.

Financial integration from the first day

The corporation tax group now requires only one form of integration, the financial one. Under § 14(1) sentence 1 no. 1 KStG, the parent must hold the majority of the voting rights attached to the shares in the controlled company. A majority of capital is not enough if it does not also carry the votes.

The timing test matters at least as much. The majority must exist without interruption from the beginning of the controlled company's financial year. Anyone who acquires the shares during a financial year does not meet the condition for that year, even if they hold the shares continuously afterwards.

Indirect holdings are taken into account, but only on one condition. The holding in each intermediate company must itself confer the majority of the voting rights. A chain of majority holdings therefore carries integration down to the granddaughter company, while a minority link in the middle breaks it.

Sentence 3 of no. 1 clarifies the case in which both exist. If the direct holding already confers the majority, the indirect one no longer matters. Direct and indirect shares are then not added together, because integration already exists without any counting.

In practice, the financial year is the lever. For a subsidiary whose financial year follows the calendar year, an acquisition in March can support the tax group only from the following January. Anyone planning a tax group therefore times the acquisition, where possible, for the first day of one of the subsidiary's financial years.

The profit and loss transfer agreement

The shareholding alone does not create a tax group. It must be joined by a contract under which the controlled company undertakes to transfer its entire profit. For this, § 14 KStG refers to the profit transfer agreement within the meaning of § 291(1) AktG, one of the enterprise agreements of stock corporation law.

§ 291(1) AktG defines it briefly: the company undertakes to transfer its entire profit to another business. A contract under which it undertakes to run its business for the account of another also counts as such an agreement. A contract covering only part of the profit does not qualify.

For a stock corporation, the Stock Corporation Act also governs how the agreement comes into being. Under § 293 AktG it becomes effective only with the approval of the general meeting, and the resolution needs a majority of at least three quarters of the share capital represented. The agreement itself must be in writing.

If the other party is itself a stock corporation or a partnership limited by shares, § 293(2) AktG requires its general meeting to approve as well. And under § 294(2) AktG, the agreement becomes effective only once its existence has been entered in the commercial register at the company's registered office.

For the GmbH, § 17 KStG contains the two requirements imposed by tax law itself. The profit transfer must not exceed the amount set out in § 301 AktG. And an assumption of losses must be agreed by reference to § 302 AktG in its currently applicable version.

§ 301 AktG caps the transfer at the annual surplus that would arise without it, reduced by a loss carried forward from the previous year, by the amount to be allocated to the statutory reserves and by amounts blocked from distribution. Sums placed in other revenue reserves during the agreement may later be withdrawn and transferred.

§ 302(1) AktG is the other side of the coin. The other party must make good every annual deficit otherwise arising during the term of the agreement, unless it is covered by withdrawals from such reserves. The parent therefore carries not only the subsidiary's profits but also its losses.

The reference must be dynamic, that is, to the currently applicable version. An agreement that restates the loss assumption in its own words, or freezes a particular version, does not meet the wording of § 17(1) sentence 2 no. 2 KStG. Here a single phrase decides the fate of the entire tax group.

The company law formalities of a transfer agreement with a GmbH, such as approving resolutions and registration, are not found in the text of the GmbH Act. They derive from case law that this course does not cover. Before signing, the draft therefore belongs in the hands of an adviser or a notary.

From when the income is attributed

The starting point is set by § 14(1) sentence 2 KStG. The controlled company's income is attributed to the parent for the first time for the calendar year in which the financial year ends in which the transfer agreement becomes effective. What counts is effectiveness, not the signature.

For a stock corporation, effectiveness means entry in the commercial register. An agreement signed in November but registered only in January therefore takes effect, with a financial year equal to the calendar year, only for the new year. The appointment at the registry court is part of tax planning.

The rule in sentence 2 has a generous side. If the agreement becomes effective at any point during a financial year, attribution already covers the whole financial year in which that happens. Registration in December is therefore enough for the full current year, provided all other conditions are met.

That last proviso is the one often overlooked. Sentence 2 only fixes the earliest possible point. Financial integration must still have existed from the beginning of that financial year. An agreement that becomes effective in a year in which the shares were bought partway through does not carry that year.

Both dates must therefore be checked separately and then laid over each other. The first year of the tax group is the earliest financial year by whose end the agreement is effective and on whose first day the voting majority already existed. If either date differs, the start moves.