Important to know for GmbH and shareholders

Overview of current court decisions and administrative instructions 2024

Frankfurt am Main

December 27, 2024

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Important current court rulings and administrative instructions for GmbH and shareholders

Here are important court rulings and administrative instructions published in 2024 that may prompt GmbHs and their shareholders to review existing structures and agreements:

Organ affiliation

– Financial inclusion in the case of qualified majority requirements at the level of the controlled company:

In its judgment of August 9, 2023 (case no. I R 50/20), the Federal Fiscal Court (BFH) ruled on the requirements for corporate tax consolidation that if the articles of association of the controlled company generally provide for a qualified majority for resolutions of the shareholders' meeting, the controlling company must also have a correspondingly qualified majority of voting rights in order to fulfill the requirement of financial integration within the meaning of Section 14 (1) Sentence 1 No. 1 of the German Corporate Tax Act (KStG) (and this continuously from the beginning of its fiscal year). In order to fulfill the criterion of financial integration, the controlling company must be able to enforce its will in the shareholders' meeting of the controlled company.

TaxPro recommendation:

From a design perspective, in light of this judgment, the majority requirements for partnership agreements must be carefully examined in specific individual cases (at least insofar as a tax group for income tax purposes could be considered).

– Financial inclusion in conversion cases (footstep theory):

With four judgments of July 11, 2024, some of which are identical in content (e.g., case number I R 36/20), the Federal Fiscal Court (BFH) confirmed and further developed its case law on the footstep theory in corporate transformation cases. Summarizing these four judgments, it can be stated that the Federal Fiscal Court (BFH) has, for the first time, ruled on the previously controversial question of the application of the footstep theory in various constellations – contrary to the opinion of the tax authorities. According to these four supreme court decisions, the acquiring corporation " fully and unconditionally assumes the tax legal position of the transferring corporation . "

TaxPro Note:

In many cases of conversion, an existing tax group can thus be continued seamlessly, since the acquiring legal entity (parent company) assumes the legal position of the transferring legal entity with regard to the characteristic of financial integration.

– Actual implementation of a profit transfer agreement (clearing account):

In its non-final judgment of June 21, 2022, the Cologne Finance Court (case no. 10 K 1406/18) ruled that a profit transfer agreement is only actually implemented if the obligations created by it are settled within a reasonable period of time. Therefore, simply posting the profit to a clearing account without prompt settlement does not lead to the settlement of the obligation created by the profit transfer agreement within a reasonable period of time. In the specific case in dispute, the profit to be transferred by the controlled GmbH to the controlling company (as well as interest payments) was only posted against the "Liabilities to Shareholders" account.

TaxPro Note:

At the turn of the year, the appeal is still pending before the Federal Fiscal Court (BFH) under case number I R 37/22, so that it can still be assumed that a simple statement under liabilities is not sufficient to recognize the “implementation” of the corporate profit transfer.

– Actual implementation of a profit transfer agreement (performance surrogates):

In its judgment of June 30, 2022, which became final in 2024, the Hamburg Finance Court (case no. 6 K 182/20) ruled on the question of the actual implementation of a profit and loss transfer agreement that the conversion of a profit and loss transfer or loss assumption claim into a loan does not, in principle, preclude the implementation of a profit and loss transfer agreement, and that such a loan does not have to be agreed at arm's length (timely fulfillment through performance substitutes). However, according to the Finance Court, the loan claim must be valuable for the agreement to be considered implemented (and thus the fiscal unity to be recognized).

TaxPro Note:

According to the Hamburg Finance Court, for the actual implementation of the profit transfer agreement, it is not sufficient, on the one hand, to simply record receivables and liabilities, since the right to profit transfer and the obligation to offset losses arise at the end of the respective fiscal year of the controlled company. On the other hand, however, as a practical solution, conversion into a loan should be sufficient, whereby prior fulfillment of the mutual claims through payment and subsequent reissuance as a loan should be just as unnecessary as the agreement of a market interest rate. The Federal Fiscal Court dismissed the appeal against non-admission, so it can be assumed that the Federal Fiscal Court has no fundamental objections to this outcome.

This case law makes it clear that the implementation of the profit and loss transfer agreement is a necessary prerequisite for the recognition of the tax group. This means that the profit and loss transfer obligation must first be recognized in the annual financial statements of the controlling company and the controlled company, and then, in the second step, be fulfilled within a reasonable time, usually by payment or, if necessary, by express conversion into a loan liability.

– Harmful consequences of the partial termination of domination and profit transfer agreements:

In its recently published decision of February 17, 2021 (case no. 2 W 31/21), the Higher Regional Court (OLG) of Jena addressed the consequences of the partial termination of domination and profit and loss transfer agreements. In the specific case, a domination and profit and loss transfer agreement concluded between two limited liability companies (GmbH) was to be amended by deleting (only) the clause concerning control. The profit and loss transfer agreement was to remain unchanged, so the parties interpreted the transaction as a simple amendment to the contract.

However, the Higher Regional Court of Jena did not consider this to be a change to the existing company agreement, but rather a cancellation of the existing company agreement combined with the conclusion of a new – isolated – profit transfer agreement.

TaxPro Note:

The content of this resolution can be of outstanding practical relevance, since the tax recognition of a corporate or trade tax group requires the existence of a profit transfer agreement with a term of at least five years. In practice, therefore, careful attention must be paid to ensuring that no termination or cancellation occurs before the expiration of the five-year minimum term.

Tax issues at the company level:

– Dividend exemption for free float dividends – also for multi-stage acquisitions during the year (so-called block acquisitions):

The regulatory framework of Section 8b of the German Corporation Tax Act (KStG) provides (with the aim of avoiding multiple corporate tax burdens/avoiding the so-called cascade effect) that dividend income and capital gains at the parent company level are disregarded when determining income, i.e., in short, they are tax-free. However, this only applies if the stake in the registered or share capital of the subsidiary corporation amounted to at least 10% at the beginning of the calendar year. According to the statutory fiction of Section 8b Paragraph 4 Sentence 6 of the German Corporation Tax Act (KStG), the acquisition of a stake of at least 10% during the year has retroactive effect to the beginning of the calendar year.

With regard to so-called block acquisitions, the Federal Fiscal Court ruled for the first time in favor of taxpayers in its judgment of September 6, 2023 (case no. I R 16/21), stating that this participation threshold can be reached through an economically single acquisition transaction from the perspective of the acquirer, even if several sellers are involved in the transaction. Therefore, the interpretation of the constituent element of "acquisition of a participation of at least 10%" used in Section 8b (4) Sentence 6 of the Corporation Tax Act (KStG) is solely based on whether an economically single acquisition transaction has occurred. The Federal Fiscal Court subsequently confirmed this case law in its judgment of March 13, 2024 (case no. I R 30/21).

TaxPro Note:

In practice, it makes no difference whether the acquisition is made by a single seller or by multiple sellers in a single transaction, because the only decisive factor is that the acquisition of at least 10% of the stake allows entrepreneurial influence to be exerted on the decisions of the corporation. In relevant practical cases, in order to utilize the tax exemption under Section 8b of the Corporation Tax Act, it should be possible, if possible, to prove (or make credible) that the relevant stake was acquired based on a single acquisition decision in a causal and temporal context (in the case in question, acquisition from multiple sellers by means of a single notarial deed).

Tax issues at the shareholder level:

– Assessment period-related interpretation of Section 17 Paragraph 1 Sentence 4 of the Income Tax Act:

In its judgment of March 12, 2024 (case no. IX R 9/21), the Federal Fiscal Court ruled that this provision must be interpreted in relation to the assessment period, and therefore requires that the transferor (seller) held a substantial/significant interest within the relevant five-year period according to the applicable legal situation for that period. In the case of shares transferred free of charge, legal succession to an already taxable share is only considered if the interest had already reached the materiality threshold at the time of the free transfer. The specific dispute concerned the special situation of 2000, in which the taxpayer's mother owned a 1.04% stake until December 2000, half of which she transferred to the taxpayer, who sold the shares in 2002. According to the legal situation in 2000, the predecessor in title (parent company) did not have a significant shareholding, since the relevant shareholding was only reduced to 1% with effect from 2001, which, according to the Federal Fiscal Court, does not have retroactive effect.

TaxPro Note:

The Federal Fiscal Court made its decision explicitly against the view of the tax authorities and, in doing so, emphasized – with decisive consequences for the decision – the importance of the constitutional principles of the protection of legitimate expectations.

– Time of loss consideration according to Section 17 Paragraph 4 of the Income Tax Act:

In its decision of December 7, 2023 (case no. IX B 12/23), the Federal Fiscal Court, confirming its previous case law, found, among other things, that the question of the timing of the consideration of a liquidation gain or loss within the meaning of Section 17 (4) Sentence 1 of the Income Tax Act (EStG) has been clarified in the highest court's case law. The decisive factor for determining the realization date of a liquidation gain or loss is the point in time at which the profit or loss would have been realized if the profit had been determined by comparing the business assets in accordance with Section 4 (1) and Section 5 of the Income Tax Act (EStG) in accordance with the commercial law principles of proper accounting.

TaxPro Note:

The timing of the tax treatment of a capital loss within the meaning of Section 17 of the Income Tax Act therefore remains in line with the principles of the established Federal Fiscal Court case law, according to which the decisive factor is not the time of the opening of insolvency proceedings, but rather the time at which a significant change in the amount of the already determined loss can no longer be expected.

In practice, it is recommended to continue claiming any liquidation losses as early as possible. If the liquidation loss is actually claimed "too early" (because its amount has not yet been determined), the taxpayer will lose the objection and, if applicable, the subsequent legal action, but can generally still claim the loss in a later assessment period. If, however, the loss is claimed "too late," the loss cannot be taken into account, at least if the tax assessments have already become final.

– Amount of capital gains in the case of a partial transfer of GmbH shares:

In its judgment of December 12, 2023 (case no. IX R 15/23), the Federal Fiscal Court (BFH) continued the so-called "strict separation theory" regarding the partial transfer of GmbH shares and ruled that if GmbH shares held as private assets are transferred to the purchaser for a partial consideration by way of a mixed gift, this transfer must be divided into a transfer of shares for a consideration (sale within the meaning of Section 17 (1) Sentence 1 and (2) Sentence 1 of the Income Tax Act) and a transfer of shares without consideration (within the meaning of Section 17 (1) Sentence 4 and (2) Sentence 5 of the Income Tax Act) based on the ratio of the actual consideration to the market value of the transferred shares. The capital gain is then determined as the difference between the sale price and the acquisition costs of the shares attributable to the consideration portion.

TaxPro Note:

This means that it has now been clarified by the highest court that in the case of a transfer of assets for partial consideration within the meaning of Section 17 of the Income Tax Act, the strict separation theory (and not the modified separation theory) applies when determining the capital gain.

– Tax consulting costs for determining the capital gain are to be considered as disposal costs within the meaning of Section 17 Paragraph 2 Sentence 1 of the Income Tax Act:

In its non-final judgment of February 22, 2024 (case no. 10 K 1208/23), the Hessian Finance Court ruled that disposal costs are not only expenses that are directly related to the disposal, but also all expenses that are caused by the disposal process. According to this definition, the term "disposal costs" within the meaning of Section 17 (2) Sentence 1 of the Income Tax Act (EStG) would also include tax consulting costs incurred in connection with the determination of the capital gains pursuant to Section 17 of the Income Tax Act.

TaxPro Note:

In view of the appeal proceedings pending before the Federal Fiscal Court (case number IX R 12/24), further legal developments should be closely monitored. Until the decision is reached, every effort should be made to ensure the deduction of corresponding tax consulting costs.

– Application of the partial income method for disposals pursuant to Section 17 of the Income Tax Act:

In its judgment of November 14, 2023 (case no. IX R 3/23), the Federal Fiscal Court (BFH) decided, in continuation of its case law, on the application of the partial income method in the case of disposals pursuant to Section 17 of the Income Tax Act (EStG), that the loss from the dissolution of a corporation pursuant to Section 17 (4) Sentence 1 of the Income Tax Act is also subject to the partial income method and the prohibition of partial deduction (Section 3 No. 40 Sentence 1 Letter c Sentence 1, Section 3c (2) Sentences 1 and 7 of the Income Tax Act).

– No right of choice for the GmbH shareholder regarding the consideration of losses according to Section 17 (4) EStG or Section 20 (2) EStG:

In its judgment of February 20, 2024 (case no. IX R 12/23), the Federal Fiscal Court ruled, among other things, on the default of loans in connection with the dissolution of a corporation that the existence of the taxpayer's option to retroactively apply the new provisions of Section 17 (2a) of the Income Tax Act (EStG) to disposals before July 31, 2019, does not invalidate the temporary continued application of the traditional legal principles for the treatment of (formerly) equity-substituting financing assistance under Section 17 of the Income Tax Act (EStG), which the Federal Fiscal Court ordered in 2017. Accordingly, taxpayers who do not exercise this option cannot waive the application of the continued application order formulated by the Federal Fiscal Court.

TaxPro Note:

In relevant practical situations, the exercise of the statutory option should be examined: either retroactive application of the new regulation in Section 17 (2a) of the Income Tax Act (EStG) or application of the traditional legal principles for the treatment of (formerly) equity-substituting financing assistance, which continue to apply according to the case law of the Federal Fiscal Court.

– Withholding tax and application requirements for the partial income method option:

In its judgment of December 12, 2023 (case no. VIII R 2/21), the Federal Fiscal Court ruled against the Fiscal Administration's view regarding the corresponding application requirements for the partial income method option for "partners with an entrepreneurial interest" that, after a valid initial application, the substantive application requirements pursuant to Section 32d (2) No. 3, Sentence 1, Letters a and b of the Income Tax Act (EStG) are to be presumed to be met in the following four assessment periods. These requirements only need to be met for the first application year; their loss in the subsequent four assessment periods is irrelevant.

TaxPro Note:

The outcome of this supreme court ruling should be presented in all relevant proceedings still pending, and the granting of the option should be requested regardless of a later loss of the requirements. This can be particularly advantageous in order to enable the (proportional) deduction of business expenses, for example, in the case of external financing expenses related to the acquisition of the investment. In the 2024 tax return, it must therefore be examined whether an application for the partial income method is possible and appropriate. This application, unless revoked, also applies to the following four assessment periods, without the application requirements having to be met in each subsequent period.

– Withholding tax and application requirements for the partial income method option:

In its judgment of July 17, 2024 (case no. VIII R 37/23), the Federal Fiscal Court confirmed its case law on the option to use the partial income method (pursuant to Section 32d (2) No. 3 of the Income Tax Act) if the application requirements no longer apply in subsequent assessment periods. Accordingly, for the option to be valid, it is sufficient that the requirements are met to a sufficient extent at any time, even for the first application year; their loss in subsequent assessment periods is irrelevant. Furthermore, the generation of capital gains pursuant to Section 20 (1) Nos. 1 and 2 of the Income Tax Act in the application year is not required for filing an application; the abstract possibility of being able to generate capital gains from the investment is sufficient.

Furthermore , so-called subsequent investment expenses are deductible as business expenses, subject to the partial deduction prohibition, even if the shareholder sells the investment in the first year of application and only expenses are incurred in the following four assessment periods.

TaxPro Note:

With this judgment, the VIII Senate of the Federal Fiscal Court has continued its previous case law from 2023 and confirmed that Section 32d Paragraph 2 No. 3 Sentence 4 of the Income Tax Act (“without the application requirements having to be proven again”) not only provides for a simplification of the burden of proof, but also a legal fiction.