Profit transfer agreement and fiscal unity personally dangerous for the managing director?

The Federal Fiscal Court (BFH) confirmed the 10.04.2019 published judgement (Ref. I R 78/16) the controversial legal opinion that the formation of provisions due to the threat of liability for taxes of the insolvent controlling company is a hidden profit distribution (vGA). Although this results in a further economic burden on the controlled company of around 140% of the liability amount, the BFH does not deal with the various counter-arguments. One may consider this to be a clearly criticisable fiscal argument in an individual case, which is not so common in practice.

However, in its judgement, the BFH goes far beyond the reasoning of the tax court by formulating the following with regard to the conclusion of the profit and loss transfer agreement (GAV): "This is because a prudent and conscientious manager of a corporation would not cause the company to transfer its entire profit to a third party outside the company and additionally assume the risk of being liable for its tax debts."

The BFH is thus negating the corporate and group law foundations of the legal institution of the consolidated tax group for income tax purposes, which has been recognised for decades and is the preferred means of structuring profit and loss equalisation within corporate groups. It has never occurred to anyone to accuse the managing director or board member of a subsidiary of not acting as a proper and conscientious manager if he signs a CLA with the parent company, on the basis of which there is also an obligation to assume losses in favour of the subsidiary.

We will carefully monitor legal developments in this respect. From now on, additional precautions should be taken when establishing a tax group in order to prevent claims for damages against the managing director personally.

Dr Wolfgang Walter is a lawyer, tax consultant and specialist lawyer for tax law at the tax law firm TAXGATE, which specialises in transactions, investments and tax compliance, and comments on the tax group regulations in the KStG commentary by Bott/Walter published by Stollfuß-Verlag.