German Tax Court Rules On Termination Of Fiscal Unity Under International Reorganization

Author:Dr. Martin Bünning and Andreas Köster-Böckenförde
Profession:Jones Day

In November 2013, the German Federal Tax Court (Bundesfinanzhof) held that an intra-group reorganization involving the transfer of shares in a German subsidiary does not constitute a good cause to terminate the fiscal unity (Organschaft).

According to the German Corporate Income Tax Act, the formation of a fiscal unity that enables the netting of profits and losses of the parent and its subsidiary is based on a corporate agreement. The tax law stipulates that such agreement requires a minimum term of five years. As an exception to this five-year minimum term, the law permits an early termination based on good cause. Generally, the sale and transfer of a subsidiary is such good cause and has been recognized by the German tax authority when the five-year minimum term has not been adhered to.

In contrast to long-standing practice, the German Federal Tax Court now holds that an internal share transfer does not qualify for a termination for good cause...

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