The tax office responsible for B-AG informed the B GmbH in a letter dated 14 October 2009 that it intended to hold B GmbH liable for B-AG’s corporation tax debts pursuant to section 73 of the German Fiscal Code (AO). By way of an actual agreement, a proportionate liability amount for the corporation tax 2000 of B-AG i.L. of … € was agreed. A corresponding liability notice was issued on 17 June 2010. In its annual financial statements as at 31 December 2009, B GmbH formed a provision in the amount of … € due to the impending liability claim in accordance with § 73 AO. In its corporation tax return for the year in dispute (2009), it expressly pointed out that it considered the liability debts to be deductible under § 73 AO because they were not taxes within the meaning of § 10 No. 2 of the Corporation Tax Act (KStG). Following an audit, the tax authorities added the deferred amount back to B GmbH’s profit off-balance sheet in accordance with section 10 no. 2 KStG and amended the 2009 corporation tax assessment accordingly. An appeal was filed by B GmbH. Judgement of the BFH The BFH stated that expenses of a controlled company due to a liability claim for corporate tax debts of the controlling company pursuant to section 73 AO do not fall under the deduction prohibition of section 10 no. 2 KStG. They are to be qualified as vGA (hidden distribution of profits). Excerpts “17. a) In the case of a corporation, a vGA within the meaning of § 8 para. 3 sentence 2 KStG is to be understood as a reduction in assets (prevented increase in assets), which is caused by the corporate relationship, affects the amount of the difference pursuant to § 4 para. 1 sentence 1 EStG in conjunction with § 8 para. 1 KStG. § Section 8 (1) KStG (for trade tax in conjunction with Section 7 GewStG) and has no connection to an open distribution. For the majority of the cases decided, the senate has assumed that the inducement is due to the corporate relationship if the corporation grants its shareholder a pecuniary advantage which it would not have granted to a non-shareholder if it had exercised the diligence of a prudent and conscientious manager (constant case law of the senate, since the judgement of 16 March 1967 I 261/63, BFHE 89, 208, BStBl III 1967, 626). In addition, the transaction must be suitable to trigger an income for the beneficiary shareholder within the meaning of § 20, para. 1, no. 1, sentence 2 EStG (constant case law, e.g. Senate judgements of 7 August 2002 I R 2/02, BFHE 200, 197, BStBl II 2004, 131; of 8 September 2010 I R 6/09, BFHE 231, 75, BStBl II 2013, 186).” “20. aa) The prerequisite for a vGA is that the asset reduction is caused by the corporate relationship. The lower court correctly points out that the standard of the conduct of a prudent and conscientious manager of the corporation within the scope of the test of inducement merely serves to specify the main cases of application of § 8 para. 3 sentence 2 KStG, but other circumstances are not excluded from the scope of application of the vGA from the outset. As a result, when examining the inducement by the corporate relationship, the general dogmatics of the inducement principle must be applied (in this sense Weber, Ubg 2017, 206); according to established case law, it is sufficient for the facts of the vGA that the reduction in assets is partly caused by the corporate relationship (e.g. Senate rulings of 17 December 2017, p. 1). e.g. Senate judgements of 23 July 2003 I R 80/02, BFHE 203, 114, BStBl II 2003, 926; of 27 April 2005 I R 75/04, BFHE 210, 108, BStBl II 2005, 702; of 20 August 2008 I R 19/07, BFHE 222, 494, BStBl II 2011, 60). 21. bb) In the present case, the latter is to be seen in the fact that the plaintiff concluded a profit and loss transfer agreement with B-AG, which led to the establishment of the tax group relationship and thus also to the assumption of the liability risk under § 73 AO. The conclusion of a profit and loss transfer agreement with the controlling shareholder is always prompted by the corporate relationship. A prudent and conscientious manager of a corporation would not oblige the company vis-à-vis a third party outside the company to transfer its entire profit to the third party and, in addition, to assume the risk of being liable for the third party’s tax debts. The assumption of such an obligation by the controlled company can economically only be explained by the overriding group interest and consequently stems from the corporate relationship.” Click here for English translation Click here for other translation ...