Consolidated VAT group (umsatzsteuerliche Organschaft) delayes assignment of VAT ID (USt-IdNr) for GmbH? (Part 8 of Founding a Company)

Introduction

In this eighth article - if you have not read it, start with the first article - I continue telling you about the highlights of incorporating two companies in a holding structure in Germany. This article focuses on questions the tax office asked me to provide about a possible consolidated VAT group (umsatzsteuerliche Organschaft) which delayed the assignment of the VAT ID (USt-IdNr).

Hi 👋

This is Kai Mindermann, the CEO of NuInnovate - with the vision of creating a world where every improvement serves a meaningful purpose. Just wanted to quickly say: Enjoy your day!

Overview

After you hand in the questionnaire for tax registration (Fragebogen zur steuerlichen Erfassung) you'll get back the tax number under which they track your company. That response also contains a list of tax areas to which it applies.

For the Holding Company the list contained:

• Corporate income tax (Körperschaftssteuer)
• Value added tax (Umsatzsteuer)
• Determination of the uniform trade tax assessment amount (Festsetzung des einheitlichen Gewerbesteuermessbetrags)
• Balance sheet in accordance with Section 5 (1) EStG or Section 141 AO in conjunction with Section 4 (1) EStG (Bilanz nach § 5 Abs. 1 EStG bzw. § 141 AO i. V. m. § 4 Abs. 1 EStG)
• Debtor capital gains tax (Schuldner-Kapitalertragssteuer)

For the Operative Company the list contained:

• Corporate income tax (Körperschaftssteuer)
• Determination of the uniform trade tax assessment amount (Festsetzung des einheitlichen Gewerbesteuermessbetrags)
• Balance sheet in accordance with Section 5 (1) EStG or Section 141 AO in conjunction with Section 4 (1) EStG (Bilanz nach § 5 Abs. 1 EStG bzw. § 141 AO i. V. m. § 4 Abs. 1 EStG)
• Debtor capital gains tax (Schuldner-Kapitalertragssteuer)

Do you see the difference? When I first received these documents, I was happy about getting the tax ID, I read the rest of the document, but apparently I missed that the letter for the Operative GmbH did not mention the Value added tax (Umsatzsteuer)?! I thought that in a few days, the letter from the Federal Central Tax Office (Bundeszentralamt für Steuern) with the VAT ID would arrive and I had everything for the Operative Company to be actually operative. Yet, that letter did not appear.

But another letter arrived, from the local tax office.

Examination of a consolidated VAT group (Prüfung einer umsatzsteuerlichen Organschaft)

The letter was titled Examination of a consolidated VAT group (Prüfung einer umsatzsteuerlichen Organschaft).

Let me share with you what the letter said:

Dear Mr. Mindermann,

As [Holding GmbH] is already managed for VAT purposes and also holds 100% of the shares in the newly founded [Operative GmbH], it is necessary to check whether a VAT group exists.

A VAT group according to Section 2 para. 2 no. 2 UStG exists if a legal entity is financially, economically and organizationally integrated into a company according to the overall picture of the actual circumstances.

It is not necessary for all three integration criteria to be equally pronounced. A tax group can therefore also exist if the integration is not complete in one of these three areas, but is all the clearer in the other areas, so that the integration is clear from the overall picture of the actual circumstances (see BFH ruling of 23.04.1964 - BStBL III p. 346 and of 22.06.1967 - BStBL III p. 715).

If a tax group exists, the subordinate legal entities (controlled companies, subsidiaries) are to be regarded as dependent in the same way as employees of the parent company (controlling company, parent company); the controlling company is the entrepreneur.

I would therefore ask you to comment on the existence of a VAT group within four weeks of receiving this letter. Please explain the financial, economic and organizational integration in detail.

Yours sincerely

Sehr geehrter Herr Mindermann,

da die [Holding GmbH] bereits umsatzsteuerlich geführt wird und zudem 100 % der Anteile an der neu gegründeten [Operative GmbH] hält, ist zu prüfen, ob gegebenenfalls eine umsatzsteuerliche Organschaft besteht.

Organschaft nach § 2 Absatz 2 Nr. 2 UStG liegt vor, wenn eine juristische Person nach dem Gesamtbild der tatsächlichen Verhältnisse finanziell, wirtschaftlich und organisatorisch in ein Unternehmen eingegliedert ist.

Es ist nicht erforderlich, dass alle drei Eingliederungsmerkmale gleichermaßen ausgeprägt sind. Organschaft kann deshalb auch gegeben sein, wenn die Eingliederung auf einem dieser drei Gebiete nicht vollständig, dafür aber auf den anderen Gebieten umso eindeutiger ist, dass sich die Eingliederung aus dem Gesamtbild der tatsächlichen Verhältnisse ergibt (vgl. BFH-Urteil vom 23.04.1964 - BStBL III S. 346 und vom 22.06.1967 - BStBL III S. 715).

Liegt Organschaft vor, sind die untergeordneten juristischen Personen (Organgesellschaften, Tochtergesellschaften) ähnlich wie Angestellte des übergeordneten Unternehmens (Organträger, Muttergesellschaft) als unselbständig anzusehen; Unternehmer ist der Organträger.

Ich bitte daher, innerhalb von vier Wochen nach Erhalt dieses Schreibens, zum Vorliegen einer umsatzsteuerlichen Organschaft Stellung zu nehmen. Legen Sie die finanzielle, wirtschaftliche, und organisatorische Eingliederung ausführlich dar.

Mit freundlichen Grüßen

Now when I write this article I have the research of what all this means already done, but when I received this letter with the above-mentioned explanations and expectations, I was caught off guard. I really wanted to have the Operative GmbH also ready with its own VAT ID. Yet, with this that got further delayed, unfortunately.

What is a VAT Group or VAT consolidation in Germany?

What's the purpose of a VAT Group and why do tax authorities care about it? It's actually intended to be a relief for both the tax authorities and the members of the VAT group. How about that!

In a VAT group only the controlling company is responsible for the tax the whole VAT group needs to pay or gets back. So regardless of the number of subsidiary companies within the VAT group, the tax office only deals, for VAT purposes, with one instead of many involved individual companies.

One important benefit of a VAT group is also that transactions between members of the VAT group are not taxable! So if there are many companies that conduct business with each other within the same VAT group, these transactions don't have to include the usual value added tax (VAT) for each transaction. Of course only if the related companies fulfill the mentioned requirements of a VAT group!

The VAT law defines for this purpose in § 2 Abs. 2 Nr. 2 UStG when a "commercial or professional activity is not exercised independently" ("gewerbliche oder berufliche Tätigkeit wird nicht selbständig ausgeübt"):

• "if a legal entity is financially, economically and organizationally integrated into the company of the controlling company according to the overall picture of the actual circumstances (tax group)" ("wenn eine juristische Person nach dem Gesamtbild der tatsächlichen Verhältnisse finanziell, wirtschaftlich und organisatorisch in das Unternehmen des Organträgers eingegliedert ist (Organschaft)")
• also (in the second sentence) "The effects of the tax group are limited to internal services between the parts of the company located in Germany." ("Die Wirkungen der Organschaft sind auf Innenleistungen zwischen den im Inland gelegenen Unternehmensteilen beschränkt.")

So they define when your company is considered not being independent (with regards to VAT) and when that is the case, they can consider the controlling company responsible for the VAT of the subsidiary!

By the way, there is also a TAX group (Organschaft) based on the Corporate income tax (Körperschaftssteuer), yet that was not relevant for now!

Regardless of all these possible benefits, I felt this made it more complicated in my case. The Holding Company is not intended to do anything related or together with the subsidiary Operative company, so it would first lead to a more complicated setup for this structure if it where a VAT group. Even with the possibility to get a separate VAT ID for companies within a VAT group, it still would lead to more interweaving between the companies than there is in reality.

Speaking about reality, is my structure a VAT group or not?

Is my holding structure a VAT Group?

When I got on the phone to get a bit more practical information from the tax office about this, they told me that it's not a choice that I can make, but it depends on the overall picture of the actual circumstances. That's why they need the detailed explanation of the financial, economic and organizational integration of the Operative GmbH into the Holding GmbH. With that they can assess if there is a VAT Group or not.

Actually the status can also change at any time, depending on the actions and circumstances of the actual integration, and in both directions. So on one day you might have a VAT Group and on the next not anymore. But let's not worry about that now, when I am just starting the companies. Also, this is something for my tax advisor to consult and support me with in the future!

So what does financial, economic and organizational integration mean for a company/GmbH?

Basically:

• a financial integration of a company, in regard to a possible VAT group, depends on the possibility of the controlling company (not their shareholders/owners) to enforce their will in the controlled (subsidiary) company.
• an economic integration of a company, in regard to a possible VAT group, depends on if they promote or complement each other; the companies must be sufficiently closely economically interlinked.
• an organizational integration of a company, in regard to a possible VAT group, depends on if there are organizational measures to ensure that the controlling company can actually enforce its will in the controlled company.

This did not make it easier to understand, right? Actually this topic took a significant time to research further, as well as to formulate the originally requested detailed explanation of it for the tax office. There are many resources that you will find if you search for it. Yet, almost all of what I found was only adding few pieces of the whole puzzle and none provided me with how I should write or actually explain it for the tax authorities. Most importantly, many of what I find lead to more and more to interpretations of fulfilling the integration criteria!

Good that it depends on the overall picture of the actual circumstances!

What I sent to the tax office about the possible VAT Group of the Operative Company

At this place I want to provide you with the final document and text which I sent to the tax office.

• ✔️ It led them to not consider my holding structure in its current setup, as a VAT Group - check!

Despite two of the integration criteria being more than close to be understood as fulfilled, my explanation and description helped to shape the correct understanding of the overall picture of the actual circumstances.

• ✔️ Really shortly after I got an update to which tax areas the originally received tax ID is used for: Value added tax (Umsatzsteuer) was added - check!
• ✔️ Similarly, shortly after, I got also the text from the Federal Central Tax Office (Bundeszentralamt für Steuern) with the VAT ID - check!

All the other articles are freely available and helped you get a better understanding, already. This topic is a little different - you clearly understand that significant effort went into the creation of the answer text to the tax office. That's why I sent it only to individuals who purchase it.

Here are three excerpts of the final document:

Opening appellation and summarizing statement (Excerpt 1)

Dear [Mr./Mrs. XY] or ladies and gentlemen by proxy,

[Operative GmbH] (hereinafter referred to as [Operative Name]) hereby wishes to comment on the issue of the VAT group, in particular the financial, economic and organizational integration into the parent company - [Holding GmbH] - to be examined.

Summary:

• From the perspective of [Operative Name], there is no consolidated VAT group, in particular due to ...

Sehr geehrte/r [Herr/Frau XY] bzw. Damen und Herren in Vertretung,

hiermit möchte [Operative GmbH] (im Folgenden [Operative Name]) Stellungnahme zur Frage der umsatzsteuerlichen Organschaft insbesondere der zu prüfenden finanziellen, wirtschaftlichen und organisatorischen Eingliederung in die Muttergesellschaft - [Holding GmbH] - abgeben.

Zusammenfassung:

• Aus Sicht von [Operative Name] liegt keine umsatzsteuerliche Organschaft vor, insbesondere wegen ...

Reference to jurisdiction (Excerpt 2)

[...] According to this view of the Jurisdiction, from [Operative Name]'s point of view, there is no ... exists, since:

• In particular because of the different ...

[...] Gemäß dieser Auffassung der Rechtsprechung liegt, aus Sicht von [Operative Name], keine ... vor, da:

• Insbesondere wegen der einführend aufgeführten unterschiedlichen ...

Closing summary (Excerpt 32)

If ... integration criteria are present to some extent or weakly pronounced, [Operative Name] considers the possibly present ... integration criteria are not decisive enough to have a greater influence on the overall picture than the possibly weak but, in the view of [Operative Name], non-existent ... integration criteria.

I would like to thank you for taking the opinion into consideration and will be happy to answer any further questions or provide explanations. In particular, I would be pleased to supplement the statement with further or more detailed information if it is not yet sufficient in the present version to justify the independence of [Operative Name] in the overall picture.

Yours sincerely

[Name of Managing Director] (Managing Director)

[Operative GmbH]

Falls ... Eingliederungsmerkmale ansatzweise bzw. schwach ausgeprägt vorliegen sollten, hält [Operative Name] die möglicherweise vorliegenden ... Eingliederungsmerkmale für nicht entscheidend genug, um das Gesamtbild stärker zu beeinflussen als die, möglicherweise schwach ausgeprägten aber aus Sicht von [Operative Name] nicht vorliegenden, ... Eingliederungsmerkmale.

Ich danke Ihnen für die Berücksichtigung der Stellungnahme und stehe für weitere Fragen oder Erläuterungen gerne zur Verfügung. Insbesondere freue ich mich die Stellungnahme mit weiteren oder genaueren Informationen ergänzen zu dürfen, falls sie in der vorliegenden Fassung noch nicht ausreicht, um die Eigenständigkeit der [Operative Name] im Gesamtbild zu begründen.

Mit freundlichen Grüßen

[Name of Managing Director] (Geschäftsführer)

[Operative GmbH]

📖 Purchase Full Document

Want to see, really, all what I wrote the tax office regarding the VAT Group? 🎉

Begin fulfillment before the end of the withdrawal period. I accept that I will lose my right of withdrawal upon complete fulfillment.

What's included?:

• ✅ 4 pages (11pt) German Text which I sent to the tax office (redacted company and personal names)
• ✅ English Translation
• ✅ Instructions for sending to the tax office
• ✅ Disclaimer of it being no tax advice

How to use it?:

• 😻 Understand what and how each integration criteria can be explained.
• 😻 Also, it could be used as a starting point for your company documentation regarding these topics
• 😻 Further, you will understand what can lead the tax office NOT considering your structure a VAT Group!

❤️ Apart from the name redactions, nothing else is redacted, and it's exactly what I sent, including all the specifics and details.

Conclusion

So far I covered a few aspects which I discovered, learned and experienced throughout the founding of two companies in a holding structure in Germany:

• Introduction, watching videos and researching the holding structure
• Making the actual step of going to the public notary and signing the certificate of incorporation
• Virtual Office/Address and Terminology for the different kinds of addresses and locations for the various forms and documents
• Do I need to be present, physically, at the local trade licensing office to perform the trade registration, despite the form being available online?
• Creating an Opening Balance Sheet, Eröffnungsbilanz, from the bookkeeping software, correctly
• Does the Holding Company really need to calculate and submit (pay) the sales tax pre-registration, Umsatzsteuer-Voranmeldung (USt-VA) after every quarter, despite not doing a lot other than waiting (for years) for the returns of the operative company?
• Why won't the bank open a bank account for the Operative GmbH after opening one without problems for the Holding Company? (Part 7 of Founding a Company)
• (This article) Delayed assignment of VAT ID / USt-IdNr because of possible consolidated VAT group / umsatzsteuerliche Organschaft?

Disclaimer

The content provided in our articles is for informational purposes only and should not be construed as legal or tax advice. Readers are encouraged to seek professional advice from qualified professionals regarding their specific legal or tax situations.