Consulting costs on sale of shares in a sub-subsidiary

Düsseldorf Fiscal Court – consulting fees on sale of a sub-subsidiary are immediately deductible

In the view of Düsseldorf Fiscal Court, the consulting services commissioned by the parent related to the sale of the sub-subsidiary are deductible operational expenditure of the parent’s, since it incurred the expenditure itself and bore it economically, which reduced its capacity.

Contrary to the tax authorities’ view, the consulting services are not to be classified as a hidden contribution by the parent to the subsidiary as defined by section 8(3) sentence 3 of the Corporate Income Tax Act (KStG) because there is no pecuniary benefit that could be contributed. In accordance with the case law of the Federal Fiscal Court (Bundesfinanzhof) and the predominant view in the legal literature, Düsseldorf Fiscal Court qualified the services as a non-contributable economic good.

Düsseldorf Fiscal Court considered that the parent’s advisory expenses did not fall under section 8b(2) sentence 2 of the Corporate Income Tax Act (KStG) as costs of disposal because the parent did not realise the sale itself. It was the subsidiary that disposed of its shareholding in the sub-subsidiary.

A prohibition on deduction by the parent is also not given under section 8b(3) sentence 3 because the consulting expenses do not constitute expense related to the sale as defined by this rule.

In Düsseldorf Fiscal Court’s view, the fact that a consolidated corporate income tax group exists between the parent and the subsidiary does not affect the immediate deductibility of the consulting fees either.

Although section 15 sentence 1 no. 2 does lay down the exemption of application of the rules of section 8b(1) to (6) in calculating the income of tax groups and shifts the application of these rules to the controlling company (the “gross method”), the condition for applying section 15 sentence 1 no. 2 is that the costs of disposal as defined by section 8b(2) sentence 2 are included in the income attributed to the controlling company.

In the case in contention, the subsidiary did not incur any costs of disposal by establishing its own liability to external consultants, which would have been subject to the restriction on deduction of section 8b(2) under section 15 when deducted by the parent. This is because the consulting services were commissioned by the parent acting in its own name and on its own account (and not that of the subsidiary). Therefore, the principles of the “abbreviated method of payment” (abgekürzter Zahlungsweg) did not apply to this case.

No duty of the subsidiary to provide reimbursement – principles of agency without authorisation do not apply

The Fiscal Court also considered that under the law the subsidiary was not under any obligation to provide reimbursement to the parent for the consulting fees. In particular, contrary to the tax authorities’ view it was not possible to derive a claim for the reimbursement of expenses from the rules governing agency without authorisation contained in sections 677, 683 and 670 of the German Civil Code (BGB).  In the case in contention, the claim for reimbursement of expenses under the above sections failed because the parent had no intention to carry on business for another party and because of section 685 of the Civil Code. Under this section, a claim for reimbursement of expenses cannot even arise if there is no intention from the outset to demand that expenses should be reimbursed.

Ultimately, it was not possible to establish that the subsidiary had costs of disposal by way of the abbreviated method of payment either, because the parent bore the expenses in its own name and for its own interest and not in that of the subsidiary.

Practical significance of the judgment

The judgment of Düsseldorf Fiscal Court of 26 February 2025 is of considerable significance for M&A. The explanation above not only applies to the disposal but probably also to the acquisition of downstream sub-subsidiaries within the group, when as part of its management functions the group parent engages external consultants and bears the costs for them.

The tax authorities have filed an appeal at the Federal Fiscal Court (Bundesfinanzhof) against Düsseldorf Fiscal Court’s judgment of 26 February 2025 (file ref. 7 K 1811/22 K). The proceedings at the Federal Fiscal Court are being conducted under I R 7/25. Similar cases should be kept open and potentially be suspended with reference to the case before the Federal Fiscal Court.

Current advisory news in brief

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