BFH strengthens holding structures: Controlling company status possible without additional commercial activity

In a landmark decision dated November 27, 2024 (Ref. I R 23/21), the BFH clarified the requirements for a partnership to qualify as a controlling company. The decision clarifies that a managing holding partnership can act as a controlling company even without further commercial activities or intra-group services provided for consideration. This applies in accordance with Art. 14 (1) sentence 1 no. 2 sentence 2 of the German Corporate Income Tax Act (KStG). The BFH thus expressly opposes the more restrictive administrative view and strengthens the practical applicability of many group and holding models.

Controlling company status of a partnership

Pursuant to Art. 14 (1) sentence 1 no. 2 sentence 2 KStG, a partnership with management in Germany may also be the controlling company of a corporate income tax group – but only if it itself carries out an original commercial activity within the meaning of Art. 15 (1) sentence 1 no. 1 German Income Tax Act (EStG), as a commercial character is not sufficient.

In practice, there are conflicting views on the question of when such a commercial activity exists, particularly if the activity is limited to a management function within the group.

BFH decision: Business management sufficient

The Federal Fiscal Court upheld the lower court's ruling and decided that, contrary to the tax office’s opinion, the managing holding company (KG) in the present case did indeed qualify as a controlling company. In doing so, the BFH applied its case law on managing holding companies to the status of controlling companies. The decisive factor was for the holding company to exercise externally recognizable uniform control over several subsidiaries. 

This requirement is generally met if the controlling company establishes and communicates guidelines on the dependent companies’ business policy. Alternatively, it is sufficient if it issues binding written instructions to the subsidiaries. Recommendations, joint meetings, or consultations may also suffice, provided they are documented in writing. This form of corporate influence is sufficient to establish a commercial activity. It would not be sufficient per se if the uniform management merely resulted tacitly from personnel links between the management teams within the group.

The decision expressly contradicts the tax authorities’ opinion (see BMF letter dated November 10, 2005, Federal Tax Gazette I 2005, 1038). Until now, the tax authorities had required that a controlling partnership must also carry out its own commercial activities that go beyond the activities of a managing holding company (see BMF letter dated November 10, 2005, BStBl I 2005, 1038).

However, the question of whether a managing holding company must necessarily “manage” at least two subsidiaries remained (explicitly) open due to its irrelevance in the case in question.  

Practical requirements: Written documentation of uniform management

In principle, the decision could considerably facilitate the structuring of holding companies, provided that the tax authorities apply the decision across the board. Examples of the necessary management actions and corresponding documentation can be seen from the BFH ruling. These include minutes of management meetings, strategic decisions, instructions, operational measures, and evidence of actual influence on day-to-day business.

The BFH's statement that there are no mandatory minimum requirements is a positive development. Rather, management must be deemed to be carried out by the holding company taking into account all relevant factors. Against the backdrop of the necessary documentation of uniform management activities, however, the provision of services in return for payment will probably continue to be taken into account as the relevant factor.