Between 2015 and 2017, the European Court of Justice and the Federal Fiscal Court subjected to a judicial review several VAT regulations in relation to consolidated VAT groups. The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), in its circular from 26.5.2017, responded to the amendments in case law concerning the establishment of a consolidated VAT group and has applied this bindingly since 1.1.2019.
If a legal entity, as a subsidiary company, is integrated financially, economically and organisationally into the parent company within the actual overall circumstances of a business then this automatically gives rise to a consolidated VAT group. The subsidiary company loses its autonomy and thus its commercial status. The result is that the parent company then has to report all the transactions and input tax for the group that has been consolidated for tax purposes and it also becomes the sole party that is liable to pay the VAT. The legal form of the parent company does not matter here.
Please note: You will fi nd more information on the subject of consolidated VAT groups in the PKF Newsletter 7+8/2017. The BMF circular from 26.5.2017 can be downloaded at www.bundesfinanzministerium.de. (German version only).
Important changes as of 1.1.2019
Previously, while companies with all kinds of legal forms could indeed be parent companies, in the case of subsidiary companies this was limited to legal entities. As of 1.1.2019, partnerships can now also be subsidiary companies if they are integrated financially, economically and organisationally. This applies not only to a GmbH & Co. KG [a German limited partnership with a limited liability company as a general partner] but also to a KG [German limited partnership], an OHG [German ordinary partnership] and a GbR [company under German civil law]. If the conditions are met then this automatically gives rise to a consolidated VAT group.
The specific integration criteria
(1) Financial integration shall be deemed to exist if the parent company is able to enforce its will in the subsidiary company by majority decisions. For the financial integration of corporations this criterion would be fulfilled in the case of more than 50% of the voting rights of the subsidiary company (absolute majority). By contrast, in the case of a partnership it would be necessary for the parent company to have an indirect or direct 100%-shareholding in the partnership. This is because this is the only way to secure the possibility of intervention that is required even if the unanimity principle is applied.
(2) Organisational integration shall be deemed to exist if the parent company is actually able to enforce its will in the company through organisational measures. It is no longer sufficient for decision-making in the subsidiary company that is at variance with the wishes of the parent company to be excluded. Furthermore, the management personnel have to be shared between the parent company and the subsidiary company. However, if the managing directors at the parent company and the subsidiary company are not the same people then, as of 1.1.2019, organisational integration can be achieved through an agreement (management rules, group corporate guidelines or an employment contract). Moreover, in the case of corporations, organisational integration would be deemed to exist if a control and profi t transfer agreement were to be available. Generally, in a deviation from the previous regulation, a consolidated VAT group shall cease to exist upon the opening of insolvency proceedings pertaining to the assets of the parent company as well as of the subsidiary company.
(3) Economic integration, whereby an enterprise is affiliated with another and is thus a subsidiary company, is deemed to exist if, according to the will of the parent company, the enterprise is economically active throughout the corporation. There has been no change here as a result of the above-mentioned new rules.
Please note: The existence of a consolidated VAT group can entail both advantages as well as disadvantages. For example, in the case of a consolidated tax group that is not recognised, considerable risks under tax law and criminal law could arise in the company in relation to the tax liability, the right to deduct input tax, tax responsibility, tax evasion as tax avoidance and the tax declaration obligations. Therefore, for newly assumed VAT group cases the organisational basis has to be created in good time. Retroactive restructuring for the purpose of eliminating a consolidated VAT group is however not possible.
StBin [German tax consultant] Elena Müller
From: PKF newsletter 06/2019