Many tax groups do not fail to qualify as a tax group because of deficiencies in the agreement itself, but because of how the agreement is implemented in practice: the profit to be transferred is correctly determined and properly recorded in the accounts, but then remains outstanding on an intercompany clearing account for years. Whether this is sufficient to satisfy the statutory requirement that the profit transfer agreement be “actually implemented” had previously remained unresolved at the highest judicial level. The Federal Fiscal Court (Bundesfinanzhof, BFH) has now answered this question and, for the first time, established a clear time limit.
In its judgment of 5 November 2025 (Case No. I R 37/22; published on 12 March 2026), the BFH defined, for the first time, a specific period within which claims arising from a profit transfer agreement must be settled.
Previous Legal Position
For a tax group (Organschaft) to be recognized for tax purposes, a profit transfer agreement must be concluded for a minimum term of five years and must be actually implemented throughout its entire term (§ 14 (1) sentence 1 no. 3 sentence 1 of the German Corporate Income Tax Act (KStG)).
Until now, however, there had been no decision by the highest tax court clarifying the period within which claims arising from a profit transfer agreement must be settled. The prevailing view in the literature had been that settlement could generally take place at a later point during the term of the agreement; in some cases, it was even considered sufficient for settlement to occur only after the tax group had ended.
Facts of the Case
A GmbH, acting as the subsidiary and controlled company within the tax group, transferred the profits for the 2009 to 2011 financial years to the sole proprietorship of its sole shareholder, which served as the controlling entity. The amounts were merely recorded as liabilities to the shareholder or parent company on a clearing account. No counterclaims were recorded on the account. The parties did not agree to set off the claims until the end of 2017. Both the tax office and the Cologne Fiscal Court denied recognition of the tax group on the grounds that the profit transfer agreement had not been actually implemented. The BFH dismissed the company's appeal.
BFH Requires Timely Settlement
The BFH has now clarified that the actual implementation of a profit transfer agreement requires the resulting claims to be settled within a reasonable period. According to the court, settlement will generally be considered timely if it takes place within twelve months after the claim falls due.
Actual implementation requires not only the recognition of the receivable or payable in the accounts, but also its proper accounting treatment and actual settlement. Accordingly, a mere accounting entry without actual repayment or an effective set-off is insufficient. This applies in particular to entries on a clearing account that is maintained without corresponding counter-entries and without regular account reconciliation or settlement.
The BFH expressly left open the question of when the claim becomes due and referred to the relevant principles of civil law. The contractual provisions are therefore of primary importance. In the case at hand, the claim became due when the annual financial statements were approved.
If profit transfer or loss absorption claims are not settled in a timely manner, the tax group may be denied retroactively under §§ 14 et seq. KStG. This can have significant corporate income tax and trade tax consequences. Profit transfers that were actually made may then be treated as constructive dividends (verdeckte Gewinnausschüttungen), potentially resulting in a subsequent liability for withholding tax on capital income plus the solidarity surcharge. This can place a significant strain on a company's liquidity and ongoing cash flow and result in a definitive tax burden. In addition, tax groups may have to recognize and tax their income independently on a subsequent basis.
Practical Recommendations
To mitigate tax risks, existing profit transfer agreements and the processes for settling profit transfer and loss absorption claims should be reviewed. Companies with tax groups should ensure that such claims are settled within twelve months of becoming due going forward.
Particular attention should be paid to companies using clearing accounts between the controlling entity and the controlled company, as well as to intra-group cash pooling and financing arrangements. It is also advisable to review the contractual provisions governing due dates and to ensure that timely settlement is properly documented and can be demonstrated.
At present, it remains unclear in particular from which point in time the new case law is to be applied and whether it will affect existing or historic tax group arrangements. These issues are currently also being raised by the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW) with the German tax authorities.
