Action required – Adjustment of Profit and Loss Transfer Agreements in “legacy cases” until the end of 2021

In 2013/2014, the so-called "Small Tax Group Reform" (kleine Organschaftsreform) led to important changes in the area of tax groups for corporate income tax purposes. Pursuant to sec. 17 para. 1 sent. 2 no. 2 of the Corporate Income Tax Act (Körperschaftssteuergesetz, KStG) in its current version, this relates in particular to the required reference to sec. 302 of the Stock Corporation Act (Aktiengesetz, AktG), which must now be structured as a so-called dynamic reference for "new agreements", i.e. Profit and Loss Transfer Agreements concluded or last amended after February 27, 2013.

"Legacy agreements", i.e. Profit and Loss Transfer Agreements concluded or last amended before February 27, 2013, were previously not affected by the new regulation to the extent they contained a loss transfer clause that complied with the requirements of sec. 17 sent. 2 no. 2 KStG in its old version. Need for action was only given in the case of "legacy agreements", which already did not comply with the requirements of sec. 17 sent. 2 no. 2 KStG in its old version. Such agreements were recognized for tax purposes only if i.a. a loss transfer was effectively agreed by December 31, 2014 at the latest in accordance with the new statutory provisions of sec. 17 para. 1 sent. 2 no. 2 KStG.

Accordingly, there were in individual cases still such "legacy agreements" with a static loss transfer provisions existing. However, according to the ruling of the Federal Fiscal Court (Bundesfinanzhof, cf. ruling of May 10, 2017, I R 93/15, BStBl. II 2019, 278), even such contracts had to be adapted to the new requirements of sec. 17 para. 1 sent. 2 no. 2 KStG at the latest in case of an amendment of sec. 302 AktG by the legislator.

As a result of the Act on the Further Development of Restructuring and Insolvency Law (Sanierungs- und Insolvenzrechtsfortentwicklungsgesetz – SanInsFoG) of December 22, 2020 (BGBl. I 2020, 3256), the loss assumption provision of sec. 302 para. 3 AktG was amended in sentence 2 by inserting the words "oder Restrukturierungsplan" (“or restructuring plan”) with effect from January 1, 2021.

"Legacy agreements" not containing a dynamic reference to sec. 302 AktG so far, have to be amended now in order to ensure that the fiscal unity for income tax purposes is continuously recognized for tax purposes and a dynamic reference that complies with the requirements of sec. 17 para. 1 sent. 2 no. 2 KStG in its current version needs to be implemented. Thus, there is a compelling need for action to adapt "legacy agreements" accordingly.

This view has also been endorsed by the Federal Ministry of Finance (Bundesministerium der Finanzen) in a letter dated March 24, 2021 (IV C 2 - S 2770/21/10001 :001). According to this letter, the recognition of the tax group for assessment periods from 2021 onwards is not prevented if the amendment of the "legacy agreements" to include the dynamic reference is made by the end of December 31, 2021 at the latest. An adjustment may be omitted if the tax group relationship ends before January 1, 2022. In addition, the Federal Ministry of Finance has clarified that the amendment of the Profit and Loss Transfer Agreement to include a dynamic reference to sec. 302 AktG does not constitute a new conclusion of the agreement and therefore does not initiate a new minimum term within the meaning of sec. 14 para. 1 sent. 1 no. 3 sent. 1 KStG.

Against this background, decision-makers in affected companies are urgently advised to review existing Profit and Loss Transfer Agreements for the need for adjustment and, if necessary, to implement a dynamic reference to sec. 302 AktG by December 31, 2021.

As regards the implementation, it should be noted that the adjustment of a Profit and Loss Transfer Agreement requires a notarized resolution of consent by the shareholders meeting of the controlled company. In this context, the Federal Ministry of Finance points out that the application for the registration of the amendment with the commercial register would have to be made by December 31, 2021 at the latest. This is remarkable insofar as the amendment of a Profit and Loss Transfer Agreement only becomes effective under German civil law upon registration in the commercial register. To be on the safe side, we would recommend to also obtain the registration in the commercial register by the end of the year and not only the filing of the application, which should be taken into account in the time planning with regard to the deadline set by the Federal Ministry of Finance.

Wording suggestions for the implementation of a dynamic reference are:
"Die Vorschriften des § 302 AktG in seiner jeweils gültigen Fassung gelten entsprechend." or "Hinsichtlich der Verlustübernahmeverpflichtung gilt § 302 AktG in seiner jeweils gültigen Fassung entsprechend."