Municipal wholly-owned companies and their tax classification are a complex issue. In its judgement of 6 May 2026, the Federal Fiscal Court (BFH) drew an important line regarding how losses from so-called ‘permanently loss-making businesses’ may be treated within a corporate tax group. The case reference is I R 5/23; the judgement was published on 16 July 2026.
What was it about?
A GmbH (the claimant) was a wholly-owned subsidiary of a local authority governed by public law. That authority, in turn, was the sole shareholder of another GmbH, known as V‑GmbH, which ran a cultural magazine, a book publishing house and a staff newspaper. All these activities generated structural, long-term losses.
A corporate tax group existed between the claimant, as the parent company, and V‑GmbH, as the subsidiary. This means that V‑GmbH’s income was attributed to the claimant for tax purposes, including its losses.
The claimant wished to set off these losses against rental income from her own property portfolio. The property portfolio did not belong to V‑GmbH, but to the claimant herself. The idea was that both items should be grouped together in a single tax category so that the losses would reduce the rental income, thereby lowering the tax burden.
What is a segmental account?
In the case of locally controlled limited companies engaged in activities that generate persistent losses, the Corporation Tax Act (KStG) prescribes a special method of determining profits, known as ‘segment accounting’ under Section 8(9) of the KStG. Under this method, different areas of activity are considered separately. As a general rule, losses incurred by one business segment may not be set off against profits from another segment. This prevents tax-privileged losses from the local authority sector from being used to offset other profits indefinitely.
The Federal Fiscal Court’s ruling
The Federal Fiscal Court (BFH) dismissed the claimant’s appeal and upheld the lower court’s ruling in its entirety. The key finding is clear: assets of the parent company, i.e. the claimant, cannot be allocated for tax purposes to a division of the subsidiary, not even as so-called ‘discretionary business assets’.
The reason lies in the fundamental principle of the group of companies. Although the income of the subsidiary is attributed to the parent company, the subsidiary remains the independent entity for the purposes of determining its income. Its losses are calculated exclusively on the basis of its own assets and activities. This does not change even if segment accounting is carried out at the level of the parent company. The losses incurred by V‑GmbH in its cultural division must therefore not be set off against rental income derived from properties owned by the claimant which do not serve the cultural enterprise.
What does that mean in practice?
This ruling is of considerable significance for organisations operating in the local authority sector that are structured as groups of companies and run businesses that consistently make a loss. This approach does not allow for the tax-efficient cross-subsidisation of losses arising from cultural or social activities using income generated from the parent company’s own assets.
Companies with similar structures should have their tax arrangements carefully reviewed. The boundaries between the individual taxable entities within a group of companies remain in place even when accounts are prepared on a divisional basis. To assess your own situation accurately, it is advisable to seek advice from a tax specialist.
Source: Haufe: Tax
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