Detailing the practical implementation of a profit transfer agreement

As a prerequisite for the recognition of a tax group for income tax purposes, section 14(1), first sentence, no. 3, first sentence of the Corporation Tax Act (KStG) requires that the profit transfer agreement (GAV) be concluded for a period of at least five years and be (effectively) implemented throughout its entire term. 

Details as to how and when such actual implementation must take place had not previously been decided by the highest courts. In its judgment of 5 November 2025 (I R 37/22), published on 12 March 2026, the Federal Fiscal Court (BFH) now clarifies important aspects of the actual implementation of a GAV, particularly with regard to the time-related requirement.

Facts

In the case in question, a limited liability company (plaintiff) had concluded a profit transfer agreement in 2002 as a controlled entity with the sole proprietorship of its sole shareholder acting as the controlling entity. In the disputed years 2009 to 2011, the claimant recorded the profits to be transferred in a liability account held solely by the shareholder, in which no receivables were recorded, without paying them out or otherwise offsetting them. It was not until December 2017 that a set-off agreement was reached between the controlled entity and the shareholder. Following an external audit, the tax authorities, in amended notices, refused to recognise the corporate and trade tax group for the years in dispute on the grounds that the actual transfer of profits within a reasonable period had not taken place. The Cologne Fiscal Court (judgment of 21 June 2022, 10 K 1406/18) dismissed the action brought against this decision.

Decision

The Federal Fiscal Court (BFH) upheld the Fiscal Court’s judgment and dismissed the plaintiff’s appeal as unfounded. The decision contains several statements of practical significance:

Recording and accounting for the claims: Referring to its previous case law, the BFH clarifies that a collective agreement must actually be ‘put into practice’ as part of its implementation. Accordingly, in addition to the objectively discernible actual fulfilment of the claims and liabilities arising from the collective agreement, these obligations must also be recorded and accounted for in the annual financial statements.

Timely fulfilment within 12 months: Actual implementation must also take place in a timely manner. The BFH generally considers fulfilment within a reasonable period after the claims arising from the GAV become due to be sufficient, which usually corresponds to a period of 12 months. Fulfilment only upon or after the termination of the group of companies is, however, not sufficient. The BFH justifies this on the basis of the wording of section 14(1), first sentence, no. 3, first sentence of the Corporation Tax Act (KStG), which requires performance ‘during’ the entire period of validity and thus prompt fulfilment, and derives the 12-month period from section 355(2) of the Commercial Code (HGB), which generally applies to the closing of accounts in current account relationships.

Mere posting to a clearing account is not sufficient: Consequently, the BFH rejects the claim that actual performance took place within the 12-month period in the years in question, as the receivables from the GAV were posted to a ‘fictitious’ clearing account on which no counterclaims or lump-sum payments were recorded, and performance therefore did not take place. Furthermore, no regular account reconciliation was carried out, as required by Section 355 of the German Commercial Code (HGB) for current accounts. The set-off in 2017, which led to actual performance, was consequently significantly delayed.

Practical guidance

This judgment gives rise to several important practical implications:

Firstly, companies with existing group relationships must ensure that the claims arising from the GAV are correctly presented in the financial statements. 

Secondly, in addition to the accounting treatment, the claims must be actually settled – whether by payment, genuine current account netting or set-off.

Thirdly, the 12-month period following the due date of the respective claim, as specified by the Federal Fiscal Court (BFH), must be strictly adhered to. The due date is determined by the provisions of the GAV – typically, it occurs upon the adoption of the annual financial statements. Companies should therefore take appropriate organisational precautions.

The BFH’s ruling is an important contribution to clarifying the requirements for the actual implementation of a GAV. Companies that maintain or plan to establish a tax group should critically review their processes in light of this decision and adapt them where necessary, in particular to minimise the risk of the tax group being retroactively disallowed.