Multi-level Consolidation of Commercial Enterprises

The Federal Fiscal Court (BFH) requested the Federal Ministry of Finance (BMF) to join the ongoing appeal proceedings with its decision of January 31, 2024, file number V R 43/21, to comment on the following questions:

Is it possible, according to § 4 paragraph 6 sentence 1 of the Corporate Tax Act (KStG), to consolidate commercial enterprises (BgA) without an organizational interconnection between the enterprises to be consolidated?

Does § 4 paragraph 6 sentence 1 KStG allow a multi-level consolidation of more than two BgA by first consolidating two BgA at a first level and then consolidating this already consolidated BgA with another BgA at a second level, where it suffices that the requirements of § 4 paragraph 6 sentence 1 KStG are met for only one of the already consolidated BgA?

Facts of the Case

The plaintiff, a public-law institution, operated various facilities, including water supply and an outdoor swimming pool. A combined heat and power plant (CHP) with a thermal output of 542 kW and an electrical output of 537 kW (CHP I), operated with biogas, was installed on the outdoor swimming pool premises. A biogas plant, located elsewhere, was connected to CHP I via a pipeline. A second, smaller CHP (CHP II) was used to generate the heat required for biogas production. The electricity generated from both CHPs was sold to the municipal utilities C as the electricity supplier.

During the disputed years from 2009 to 2014, the heat generated in CHP I was primarily supplied to the swimming pool during the approximately five-month outdoor swimming pool season. During the rest of the year, third-party customers in a newly designated development area near CHP I, for which a connection obligation existed, were mainly supplied with heat. The plaintiff offset the negative income from the operation of the outdoor swimming pool against the income from water supply and electricity and heat generation from the operation of the CHPs in their corporate and trade tax returns for the disputed years, based on the assumption that a commercial enterprise (BgA) "Supply" existed, to which the outdoor swimming pool, the CHPs, and the water supply should belong.

Following an external audit, the tax office assumed that the operation of the biogas plant, including CHP II, as well as CHP I and the water supply, could be consolidated as supply enterprises within the meaning of § 4 paragraph 6 sentence 1 number 1 KStG. However, the operation of the outdoor swimming pool was considered an independent BgA and could not be consolidated with another BgA due to a lack of close technical-economic interconnection.

After the objection was unsuccessful, the Schleswig-Holstein Fiscal Court upheld the lawsuit (judgment of June 17, 2021, 1 K 115/17, EFG 2022, 265). It determined that although the operation of the CHPs, the outdoor swimming pool, and the water supply each represented independent BgA, these could be consolidated through a two-step examination process according to § 4 paragraph 6 sentence 1 number 3 and number 2 KStG. In a first step, the BgA CHP and the BgA water supply could be consolidated as supply enterprises according to § 4 paragraph 6 sentence 1 number 3 KStG. The thus consolidated BgA water supply/CHP could then be consolidated with the remaining BgA – the BgA outdoor swimming pool – in a second step according to § 4 paragraph 6 sentence 1 number 2 KStG. The court found that according to a letter from the Federal Ministry of Finance dated November 12, 2009 (BStBl I 2009, 1303, paragraph 5), it suffices for the consolidation of a BgA with an already consolidated BgA that the consolidation requirements are only met between this BgA and one of the BgA of the consolidated BgA. It was determined that a close technical-economic interconnection of some significance existed between the BgA outdoor swimming pool and the BgA CHP.

Reasons for the Decision

The BMF is requested to comply with the accession according to § 122 paragraph 2 sentence 3 of the Fiscal Court Order (FGO).

In the case at hand, it must first be clarified whether a consolidation of commercial enterprises (BgA) without organizational interconnection is possible according to § 4 paragraph 6 sentence 1 KStG. Furthermore, it must be decided whether this regulation allows a multi-level consolidation of more than two BgA. In this process, two BgA are consolidated at the first level, and at the second level, it suffices for the consolidation of these already consolidated BgA with another BgA that the requirements of § 4 paragraph 6 sentence 1 KStG are only met for one of the already consolidated BgA.

The tax administration does not require organizational interconnection for the application of § 4 paragraph 6 KStG but accepts that for exercising the tax option for the consolidated BgA, only an independent determination of profits is conducted (see BMF letter dated November 12, 2009, BStBl I 2009, 1303, paragraph 1 sentence 5, paragraph 3). However, the interpretation of this regulation by the tax administration appears doubtful in the opinion of the recognizing Senate. In view of the possibility that regulations of the BMF letter dated November 12, 2009 (BStBl I 2009, 1303) could be considered as not consistent with the applicable law (according to § 176 paragraph 2 of the Fiscal Code), the BMF is requested to comply with the accession.

Note:

It remains to be seen what decision the current discussion case will present after the BMF has joined. This could result in new opportunities for tax planning regarding the offsetting of losses by public authorities.