The tax group in income tax law

Why Can a Tax Group for Income Tax Purposes Be Beneficial?

The concept of a consolidated tax group for income tax purposes allows the consolidation income of profits and losses among two or more legally independent companies within a corporate structure. Under this arrangement, the profits and losses of the so-called controlled company are allocated to the parent company, the so-called controlling company. This procedure shifts the tax burden to the parent company’s level, enabling profits and losses within the corporate group to offset each other. For example, a profit generated by one controlled company can be combined with a loss incurred by another at the parent's level, so only the net remaining profit is taxed. This mechanism helps balance out varying income positions across the group. The consolidated tax group for income tax purposes can also be used as a structuring tool to distribute the profits of the subsidiary to the parent company without incurring additional taxes as a result of the distribution in addition to the original taxation of the profits.

In summary, establishing a tax group can be a vital tool for optimising the tax position of a corporate group.

How does a Tax Group for Income Tax purposes work?

To set up a tax group for income tax purposes, certain requirements must be fulfilled:

• Requirements for the controlling company: Generally, the controlling company must be a taxpayer with unlimited tax liability in Germany and engaged in commercial activity. This includes individuals, corporations and commercial partnerships established to conduct business
• Requirements for the controlled company: Only corporations qualify as controlled companies. While these do not necessarily need to have their registered office in Germany, their management must be located there.

Note: Although a tax group can technically be formed with a controlled company based in an EU or EEA member state, the benefits of the tax group are confined to Germany. Cross-border tax groups are therefore not possible.

• Financial integration: The controlling company must hold the majority of voting rights in the controlled company. Further economic or organisational integration is not required.
• Profit and loss transfer agreement: A profit and loss transfer agreement must be concluded between the parent company and the controlled company that is valid, effective and actually implemented for at least five years. In this agreement, the parent company and the controlled company undertake to transfer the entire profit of the controlled company to the parent company or to absorb the entire loss of the controlled company by the parent company. The profit and loss transfer agreement must be entered in the commercial register of the controlled company and becomes effective from this date.

Note: The tax group takes effect in the fiscal year the agreement is entered in the commercial register, with the five-year minimum period starting from that year.

If the tax group has been effectively established, the income of the controlled company is attributed to the controlling company. Nevertheless, profits are determined separately for the individual companies in the tax group. Accordingly, the controlled company must declare its own income to the tax authorities. However, corporation tax and trade tax are not assessed at the level of the controlled company. Instead, the income of the controlled company is attributed to the controlling company and included in its taxable income calculation and tax assessment.

How we can support you

Let us help you navigate the complexities of forming and optimising a tax group for income tax purposes in Germany. We provide comprehensive strategic advice for the companies in your corporate group based in Germany and support you in fulfilling both the legal and tax-related structural requirements for a consolidated tax group for income tax purposes in Germany and in making the best possible use of its tax advantages. In addition, through our RSM network, we ensure that any cross-border tax and legal questions are also addressed effectively.