A Profit Transfer Agreement

For reasons of creditor protection, even after the termination of the profit shifting agreement, there is an obligation to pay the company obliged to transfer profits (Art. 303(1) AktG). Thus, the controlling company must provide a guarantee to the creditors of the dependent company whose claims have been established before the registration of the termination of the contract in the commercial register is deemed to be known, or provide it (§ 303 para. 3 AktG) [8] if they contact it within six months of notification of the registration. If there is a profit shifting agreement, the company to which the profit is to be transferred is also required to assume losses in accordance with Paragraph 302(1) of the German Joint Stock Companies Act (AktG). The minimum content of such a contract results from Paragraph 291(1)(1) and Paragraph 304(3)(1) of the AktG, that is to say, from the obligation of the dependent company to transfer all profits and from the obligation of the controlling company to offset the losses (§ 302 paras. 1 and 3 AktG). Throughout the term of the contract, it shall compensate for any annual deficit of the company required to transfer profits, unless this is offset by the withdrawal of amounts from other revenue reserves allocated to it during the term of the contract. Because of the loss-bearing obligation automatically associated with profit shifting agreements, these corporate agreements are often referred to neutrally as profit shifting agreements. [4] As a result, such “old contracts” with static regulation on the transfer of losses still existed in individual cases. However, according to the decision of the Federal Finance Court (Bundesfinanzhof, cf. judgment of 10 May 2017, I R 93/15, BStBl.

II 2019, 278), such contracts also had to comply with the new requirements of § 17 sec. 1 sec. 2 no. 2 KStG at the latest in the event of an amendment of § 302 AktG by the legislator. The variable to be transferred between the parties under the profit shift agreement is either the net profit for the year or the net profit for the year, as would result under § 268 of the German Commercial Code (HGB) if there were no profit shifting agreement (notional net income). The profit is fictitious because, as a result of the profit shifting agreement, a profit is no longer reported in the final business balance sheet of the dependent company; On the contrary, the amount to be paid appears here as a liability to the affiliated companies on the liability side of the balance sheet after being recorded in the profit and loss account as an expense in accordance with Paragraph 277(3)(2) of the HGB [5]. Even after the reversed financial statements of § 301AktG, profit shifting is included in the net profit for the financial year and therefore does not constitute a use of net profit within the meaning of S.d. Section 268 (1) (2) of the German Commercial Code (HGB). The profit to be transferred is further limited by statutory reserves in accordance with § 300 of the German Joint Stock Companies Act (AktG) and is blocked for distribution in accordance with § 268 (8) of the German Commercial Code (HGB). Buyers and sellers acknowledge that Kendro GmbH made advance payments to SPX Europe prior to the balance sheet date under Kendro GmbH`s profit transfer agreement on profits for the financial years 2004 and 2005. Retained gains and losses are incurred only at the balance sheet date, so only the balance sheet result presented at the balance sheet date should be transferred or offset.

On the other hand, annual profits or losses are not covered by the obligation to offset a profit shifting agreement. The retained earnings to be transferred must be recognised as expenses in the income statement (§ 277 (3) sentence 2 HGB) and appear on the liabilities side of the balance sheet as “liabilities to affiliates” (§ 266 para. C 3 no. C 6 HGB). The loss to be compensated by the controlling company is the notional annual deficit within the meaning of § 275(2) and (3) HGB, which may, however, arise as a result of the control company`s obligation to pay damages (§ 277 (3) HGB). Any damage, regardless of the method of implementation, must be compensated because of structural liability [6]. A profit shift agreement only becomes important as a tax group agreement. It is a purely fiscal contract that regulates the tax distribution of the income of the dependent company (the so-called controlled company) as income of the controlling company (the so-called control company). The prerequisite for this is the profit shifting agreement According to German law, the transfer of profits to the parent company is not an ordinary business transaction. It is usually covered by a profit and loss agreement, which defines the formula of the amount of profits to be transferred each year. The formula also includes the transfer of funds when the parent company reimburses the losses of the subsidiary. This view was also shared by the Federal Ministry of Finance by letter of 24 March 2021 (IV C 2 – S 2770/21/10001:001).

Accordingly, the accounting of the tax group for tax periods from 2021 onwards is not excluded if the modification of the “old contracts” to include the dynamic reference takes place no later than the end of 31 December 2021. An adjustment cannot be made if the tax group ratio ends before January 1, 2022. In addition, the Federal Ministry of Finance clarified that the amendment of the profit shifting agreement to include a dynamic reference to § 302 AktG does not constitute a new contract conclusion and therefore does not initiate a new minimum duration within the meaning of Article 14 (1) sentence 1 no. 3 sentence 1 KStG.c i.e. profit transfer agreements concluded or last amended before 27 February 2013 did not not yet affected by the new order to the extent that they contained a loss transfer clause that meets the requirements of § . . .