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!

Here is the full document I sent to the tax office:

Statement on VAT Group

Dear [Ms/Mr 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 the lack of economic integration.
• Either way, a separate VAT identification number is required for [Operative GmbH], which we hereby request, as already stated in the tax registration questionnaire.

Introduction:

First of all, it should be emphasized that [Operating Name] and the Parent Company each have a completely different corporate purpose:

• [Operative Name]: Pre-development and development, the operation and sale of information technology, in particular software-based, products and services as well as all related activities and business.
• Parent company: Management of its own assets, in particular the establishment, acquisition, sale, holding and management of investments in its own name and for its own account, not as a service for third parties. In our view, this results in a fundamentally different focus for the two companies, particularly in terms of the revenue generated.

1. Financial independence: Is [Operative Name] financially integrated into the parent company? “In principle, financial integration within the meaning of sec. 2 para. 2 no. 2 UStG requires that the controlling company holds the majority of the voting rights in the controlled company.” (vgl. ECLI:DE:BFH:2023:U.180123.XIR29.22.0) According to this view of the case law, financial integration could be given due to the 100% shareholding, however:

• There are no profit transfer agreements or prior agreements on the distribution of profits. Although the appropriation of profits could be significantly influenced by the sole shareholder, the parent company, due to the long-term strategy, the decision must be made primarily from the overriding perspective and interests of [Operative Name].
• [Operative Name] has its own bank account and carries out independent financial transactions that are separate from those of the parent company.
• The [Operative Name] has an independent capital structure and is able to make its own investments and financing independently of the parent company (i.e. it is solely liable for its financial obligations, without the involvement of the parent company). This means that it has sufficient equity and financing to conduct its business.
• Separate accounting: The [Operative Name] keeps its own accounts and prepares its own financial statements, which are not consolidated with those of the parent company. Consequently, [Operative Name] considers itself to be financially autonomous and independent of its parent company.

2. Economic independence: “For economic integration, the corporate divisions of the controlling company and the controlled company must be intertwined according to the established case law of the BFH (see, among others, BFH ruling of 01.02.2022 V R 23/21, juris; BFH ruling of 07.07.2011 V R 53/10, BFHE 234, 548, BStBl. II 2013, 218). For economic integration within the meaning of sec. 2 para. 2 no. 2 sentence 1 UStG, it is sufficient that there is a reasonable economic connection between the controlled company and the company of the controlling company in the sense of an economic unit, cooperation or interdependence. The activities of the tax group parent and the tax group subsidiary merely have to be coordinated and thereby promote and complement each other (cf. inter alia BFH ruling of 03.04.2003 V R 63/01, BFHE 202, 79, BStBl II 2004, 434).” See Münster Fiscal Court, 5 K 232/18 U (ECLI:DE:FGMS:2023:0323.5K232.18U.00) According to this view of the case law, there is no economic integration from the perspective of [Operative Name], as:
   • In particular because of the different corporate objects listed in the introduction, there are no interwoven corporate divisions.
   • The [Operative Name] serves its own customer base, which is freely chosen, and maintains independent contracts that differ from those of the parent company. In particular, the parent company is not a customer or client.
   • The products or services offered by [Operative Name] are positioned differently and independently compared to the parent company and are developed independently.
   • The pricing and conditions of [Operative Name] are determined independently and are independent of the parent company.
   • Marketing and sales activities are developed and carried out independently to meet the specific needs of [Operative Name]. There is no joint presence on the market.

• No activities of [Operative Name] and [Holding GmbH] that are essential for the economic operation are coordinated with each other. They do not promote or complement each other. For example, there are no material paid services between the companies.

Consequently, [Operative Name] considers itself economically autonomous and independent of its parent company.

3. Organizational independence: “As a rule, organizational integration presupposes that the management of the tax group parent and the tax group subsidiary are interlinked in terms of personnel (BFH rulings from 03.04.2008 - V R 76/05, BStBl II p. 905, from 28.10.2010 - V R 7/10, BStBl II 2011 p. 391 and from 02.12.2015 - V R 15/14, BStBl II 2017 p. 553). This is the case, for example, if there are identical persons on the management bodies of both companies (see BFH rulings from 17.01.2002 - V R 37/00, BStBl II p. 373, and from 05.12.2007 - V R 26/06, BStBl II p. 451).” Cf. UStAE 2.8 According to this view of the case law, financial integration could be given due to the management in personal union, however:
   • Despite having the same managing director, [Operative Name] and [Holding GmbH] operate as separate and independent entities.
   • The business operations of [Operative Name] are specifically focused on the pre-development, development, operation and distribution of information technology, in particular software-based, products and services, while the parent company concentrates on the management of investments and assets.
   • Resources are allocated separately for each company, with personnel, finances and other resources being specifically adapted to the requirements and objectives of the respective corporate structure.
   • The individual corporate cultures of [Operative Name] and the parent company are reflected in their business areas, values and internal structures, which further underlines their organizational independence.
   • Clear competencies and responsibilities within the companies ensure an effective individual organization and show that both companies are independent entities despite having the same natural person as managing director.

• Although [Name of Managing Director] is the sole managing director of both [Operating Name] and the parent company, he acts strictly in accordance with the arm's length principle. This means that all decisions and actions in his capacity as Managing Director of [Operative Name] are made as if they were made by an independent third party with no connection to the parent company. Business decisions and operational processes of [Operative Name] are made independently of the interests of the parent company, taking into account its specific requirements and objectives.

Consequently, [Operative Name] sees itself as organizationally autonomous and independent of its parent company.

Summary assessment:

Due to the described - in particular economically predominantly - independent relationships of [Operative Name] vis-à-vis the parent company, [Operative Name] does not see any VAT group in the overall picture and is pleased to be able to continue to act independently.

From the perspective of [Operative Name], the characteristic of economic integration is not present in the sense that it could not only be weak, but is not present at all. Therefore, the corresponding required criterion “and organizationally” pursuant to Section 2 (2) no. 2 UstG is not fulfilled. If economic integration features are present to some extent or weakly developed, [Operative Name] does not consider the possibly existing financial and organizational integration features to be decisive enough to influence the overall picture more strongly than the economic integration features, which may be weakly developed but are not present from [Operative Name's] point of view.

I would like to thank you for your consideration of the statement 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]

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.