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Germany: Has the ECJ opened the door to horizontal group relief?

Christof Letzgus
On June 12 2014, the ECJ issued a ruling in three joined cases on the Dutch fiscal unity regime. It held that the legislation allowing members of a tax group to consolidate their results must include local sub-subsidiaries of non-resident intermediate parents (vertical relief) as well as associated companies held by a common parent in another member state (horizontal relief).

The cases did not deal with the use of final losses, and the taxpayers did not seek cross-border loss relief but only the consolidation of profits and losses between Dutch corporations.

The court's confirmation of the vertical relief between a parent company and an indirect sub-subsidiary resident in the same country (SCA and MSA) appears to follow its previous decisions in the French Papillon case and the UK Felixstowe ruling and was therefore to be expected.

In the third case (X), two Dutch companies held by a common German resident parent claimed horizontal relief under the Dutch fiscal unity regime. The court treated the exclusion of Dutch companies with the same foreign parent as an infringement of the EU parent's freedom of establishment in the Netherlands as the fiscal unity group condition of a 95% controlling interest of the parent in the subsidiary had been met. The court argued that the goal of the fiscal unity regime was to align the tax treatment of the fiscal unity group with that of a single taxpayer. This could be achieved equally for associated companies owned by a common parent without restricting the taxing rights of the two member states.

This judgment casts doubt on a recently introduced requirement in Germany that an Organschaft subsidiary be attributable to a German permanent establishment of the parent.

The German Government, which supported the Netherlands before the ECJ, now fears a challenge to the Organschaft rules as these are limited to vertical relief between parent and – direct or indirect – subsidiaries.

Senior officials have argued that the ECJ case should not affect the German Organschaft regime as this requires a 'vertical' profit and loss transfer agreement between parent and subsidiary and this cannot be concluded between subsidiaries alone.

However, the arguments presented in the X case, suggest that the ECJ might see this contractual impossibility as a further unjustified discrimination.

It therefore appears to be not unlikely that the German transfer agreement requirement might be abolished altogether. An EU-compliant modernisation of the tax consolidation rules was on the agenda of the previous government in 2009. It has been postponed for the time being as the government has lost confidence in its ability to find a revenue-neutral solution.

Christof Letzgus (christof.letzgus@de.pwc.com)
PwC
Tel: +49 69 9585 6493
Website: www.pwc.de

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