An end to the fairness rule for legacy profit transfer agreements

According to a new Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) circular, from 3.4.2019, profit transfer agreements that have hitherto included no reference to the application of Section 302(4) of the Stock Corporation Act (Aktiengesetz, AktG) (statute of limitations clause) will no longer be protected by the BMF’s fairness rule in its circular from 16.12.2005. The profit transfer agreement in legacy contracts without such a reference will have to be amended by including a dynamic reference to Section 302 AktG and this will have to be entered in the commercial register by 31.12.2019.


Previous reference to Section 302 AktG

According to Section 17 clause 2 no. 2 of the Corporation Tax Act (Körperschaftsteuergesetz, KStG), a particular prerequisite for the recognition of a consolidated tax group for tax purposes is an explicit agreement on loss absorption with reference to the provisions of Section 302 AktG. A new statute of limitations rule was added to Section 302 in para. 4 AktG on 9.12.2004. Subsequently, profit transfer agreements that had been concluded prior to 1.1.2006 were recognised for tax purposes by the German tax authorities in a BMF circular from 16.12.2005 (case reference: IV B 7 S 2270-30/35) even if they did not include a reference to this Section 302(4) AktG. According to the view of the BMF, these legacy contracts did not have to be adjusted.

New versions of profi t transfer agreements and the dynamic reference

However, according to this BMF circular from 2005, new agreements had to be structured in such a way that they either referred generally to Section 302 AktG or included useful citations from paragraph 4 of the Act. In 2013, Section 17(1) clause 2 KStG was supplemented with the phrase “as amended” (dynamic reference). It was possible to subsequently add this dynamic reference to existing profit transfer agreements until 1.1.2015. This subsequent addition did not result in the “conclusion of a new contract” so that the five-year limit for the recognition of contracts for tax purposes did not have to start once again. From the point of view of the tax authorities, legacy contracts from the period prior to 1.1.2006 were spared this adjustment period.

Federal Fiscal Court clarified legacy cases, too

The Federal Fiscal Court (Bundesfinanzhof, BFH), in it ruling from 10.5.2017 (case reference: I R 93/15) then reiterated that there was an obligation to refer to the statute of limitations clause in a profi t transfer agreement and, where necessary, to insert this subsequently. The supreme court expressly rejected the application of the BMF circular from 16.12.2005. The BFH has explicitly excluded recognising a consolidated tax group in spite of the missing reference.


The BMF’s new application rules

The BMF responded to the new ruling in its circular from 3.4.2019 (case reference: IV C 2 – S 2770/08/1000). According to this, the tax authorities will no longer tolerate contracts without the correct reference. By the end of 31.12.2019, a dynamic reference will have to be added to all existing legacy contracts that were previously covered by the fairness rule in the BMF circular from 16.12.2005. These adjustments will not constitute newly concluded contracts either. Adjustments will no longer have to be made solely in the case of tax group relationships that will cease to exist prior to 1.1.2020

Recommendation: If you have not already done so then by 31.12.2019, at the very latest, you will have to add a dynamic reference to Section 302 AktG to profit transfer agreements that were concluded before 1.1.2006.

StBin [German tax consultant] Sabine Rössler

From: PKF newsletter 06/2019