Germany: Merger of profit company into loss company; intercorporate dividend relief on share acquisitions

Tax court decisions concerning merger of profit company and intercompany dividend relief

Tax court decisions concerning merger of profit company and intercompany dividend relief

Recent tax court cases in Germany concern the tax treatment of a merger of a "profit company" into a "loss company" and the intercompany dividend relief regarding multiple acquisitions of shares during the year.

Not abusive tax arrangement, merging "profit company" into "loss company"

The German Federal Tax Court (BFH) in a November 2020 case decided that, under 2008 legislation, merging a “profit company” into a “loss company” with the loss company offsetting the positive income of the profit company against its own losses does not constitute an abuse of tax planning options.


Pursuant to § 42 of the German tax law (AO), taxpayers cannot circumvent the tax law by using abusive legal options for tax planning. When the tax law's provision intended to prevent circumvention of the tax law is met, the legal consequences are to be determined pursuant to that provision. In other cases, the tax liability in the event of an abusive arrangement arises in the same manner as it would arise through the use of legal options appropriate to the economic transactions concerned.


The taxpayer (a German limited liability company) had liquidity problems at the end of 2008. It was facing insolvency. The usual sources of liquidity (such as capital injections by shareholders or bank loans) were not an available option to boost liquidity. The taxpayer acquired all shares in a second company that was subsequently merged into the taxpayer company. The loss due to the merger was not recognised for tax purposes. However, the second company's positive income was offset against the taxpayer's loss carryforwards—thus “releasing” the taxpayer company's tax loss provisions. After a deduction of the purchase price, the taxpayer received liquid assets because the assets were no longer displaced by provisions.

The tax authorities challenged whether the merger of a profit-making company into a loss-making company constituted an abuse of tax planning options within the meaning of § 42 AO as applicable in the year under dispute (2008).

The BFH held that § 42 AO leaves no doubt that provisions of separate tax laws supersede the application of § 42 AO only when the elements of these provisions are relevant. Based on these standards, taking the income generated by the profit-making company into account in the taxpayer’s tax treatment pursuant to the legislation applicable in 2008 was not an abuse of law. As of 2008, there was no circumvention-prevention provision in a separate tax law measure that would have prevented the acquisition of shares and the merger of a profit-making company.

The court further found there was no abuse of the law because the arrangement was not unreasonable. The taxable entity was fundamentally permitted to arrange its affairs such that no or as little tax as possible was incurred and, in doing so, freely applied civil law arrangements as provided for by law. The court observed:

  • A legal arrangement is only unreasonable when the taxable entity does not apply the arrangement provided for by the legislature to achieve a particular economic objective, but instead chooses an unusual venue by which the objective could not be achievable in the legislature's judgment.
  • An arrangement that does not have any discernible economic purpose cannot be taken as a basis for taxation.
  • Arrangements aimed at allowing the taxable entity to use a loss that it generated have not been found to be an abuse of law in numerous judgments. In principle, it is not necessary to justify the offsetting of “genuine” business losses by other non-tax motives.

KPMG observation

The legislature in 2013 enacted a provision to prevent the offsetting of positive income generated by the transferring entity during the retroactive period against loss carryforwards of the acquiring legal entity.

Intercorporate dividend relief when multiple acquisitions of shares during the year

The tax court of Hesse decided that the acquisition of shares is considered to have taken place at the beginning of the calendar year for tax purposes, provided that the share level reached was at least 10% at any point during the calendar year. 


Distributions (dividends) by a German limited liability company to another German limited liability company are generally tax-exempt. By contrast, 5% of a dividend distribution is considered to be non-deductible business expenses, so that 95% of the distribution must be excluded from taxation as a result. However, this rule only applies if the direct investment at the beginning of the calendar year equals at least 10%. Investments (participating interests) via a partnership must be attributed to the partner on a proportional basis and are considered a direct investment. 


The suit was brought by a limited partnership with a limited liability company as general partner whose business purpose was the holding and administration of all shares in the limited liability company (GmbH M).

The taxpayer had concluded a profit-and-loss transfer agreement, based on which a tax group was established. Individual companies also held partnership interests in the taxpayer itself. In the year under dispute, several of its founding partners sold part of their limited partnership interests in the taxpayer to new partners. In this context, GmbH C acquired a total share of about 13% (brokered via partial limited partners' shares of about 5%, 2%, and 6% each). In its assessment return for the year under dispute, the taxpayer treated the part of a so-called “additional transfer from prior to the tax pooling (Mehrabführung aus vororganschaftlicher Zeit)” attributable to GmbH C as a tax-exempt distribution.

In dispute was whether GmbH C benefitted from the intercorporate dividend relief as a result of multiple acquisitions of shares of at least 10%. The tax authorities took the position that participating interests acquired from various sellers during the year below the investment threshold of 10% on an individual or separate basis do not allow for application of the tax relief and that this is not affected by the fact that the acquisitions occurred on a contractual basis.

The tax court held for the taxpayer. The term “investment” was held to relate to the sum of the shareholder's rights in the capital and profit of the corporation and that the term “acquisition” of such an investment (participating interest) included all transactions under civil law that contributed to creation of the participating interest over the course of the calendar year. Thus, acquisition of the participating interests from three sellers totalling about 13% were found to have a retroactive effect on the beginning of the year under dispute (2014) and thus the investment was eligible for the tax exemption—regardless of the fact that the outcome would be identical also when applying the narrower view of at least considering “block acquisitions,” given that GmbH C acquired its investment based on a single decision and by implementing an overall plan in this respect by means of a single legal transaction under the law of obligations.

This decision is not yet final. An appeal is pending before the German Federal Tax Court.

Read a July 2021 report [PDF 384 KB] prepared by the KPMG member firm in Germany

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