Muni\u00adci\u00adpal whol\u00adly-owned com\u00adpa\u00adnies and their tax clas\u00adsi\u00adfi\u00adca\u00adti\u00adon are a com\u00adplex issue. In its jud\u00adge\u00adment of 6 May 2026, the Fede\u00adral Fis\u00adcal Court (BFH) drew an important line regar\u00adding how los\u00adses from so-cal\u00adled \u2018per\u00adma\u00adnent\u00adly loss-making busi\u00adnesses\u2019 may be trea\u00adted within a cor\u00adpo\u00adra\u00adte tax group. The case refe\u00adrence is I R 5\/23; the jud\u00adge\u00adment was published on 16 July 2026.<\/p>\n\n\n\n
A GmbH (the clai\u00admant) was a whol\u00adly-owned sub\u00adsi\u00addia\u00adry of a local aut\u00adho\u00adri\u00adty gover\u00adned by public law. That aut\u00adho\u00adri\u00adty, in turn, was the sole share\u00adhol\u00adder of ano\u00adther GmbH, known as V\u2011GmbH, which ran a cul\u00adtu\u00adral maga\u00adzi\u00adne, a book publi\u00adshing house and a staff news\u00adpa\u00adper. All the\u00adse acti\u00advi\u00adties gene\u00adra\u00adted struc\u00adtu\u00adral, long-term losses.<\/p>\n\n\n\n
A cor\u00adpo\u00adra\u00adte tax group exis\u00adted bet\u00adween the clai\u00admant, as the parent com\u00adpa\u00adny, and V\u2011GmbH, as the sub\u00adsi\u00addia\u00adry. This means that V\u2011GmbH\u2019s inco\u00adme was attri\u00adbu\u00adted to the clai\u00admant for tax pur\u00adpo\u00adses, inclu\u00adding its losses.<\/p>\n\n\n\n
The clai\u00admant wis\u00adhed to set off the\u00adse los\u00adses against ren\u00adtal inco\u00adme from her own pro\u00adper\u00adty port\u00adfo\u00adlio. The pro\u00adper\u00adty port\u00adfo\u00adlio did not belong to V\u2011GmbH, but to the clai\u00admant hers\u00adelf. The idea was that both items should be grou\u00adped tog\u00ade\u00adther in a sin\u00adgle tax cate\u00adgo\u00adry so that the los\u00adses would redu\u00adce the ren\u00adtal inco\u00adme, ther\u00adeby lowe\u00adring the tax burden.<\/p>\n\n\n\n
In the case of local\u00adly con\u00adtrol\u00adled limi\u00adt\u00aded com\u00adpa\u00adnies enga\u00adged in acti\u00advi\u00adties that gene\u00adra\u00adte per\u00adsis\u00adtent los\u00adses, the Cor\u00adpo\u00adra\u00adti\u00adon Tax Act (KStG) pre\u00adscri\u00adbes a spe\u00adcial method of deter\u00admi\u00adning pro\u00adfits, known as \u2018seg\u00adment accoun\u00adting\u2019 under Sec\u00adtion 8(9) of the KStG. Under this method, dif\u00adfe\u00adrent are\u00adas of acti\u00advi\u00adty are con\u00adside\u00adred sepa\u00adra\u00adte\u00adly. As a gene\u00adral rule, los\u00adses incur\u00adred by one busi\u00adness seg\u00adment may not be set off against pro\u00adfits from ano\u00adther seg\u00adment. This pre\u00advents tax-pri\u00advi\u00adle\u00adged los\u00adses from the local aut\u00adho\u00adri\u00adty sec\u00adtor from being used to off\u00adset other pro\u00adfits indefinitely.<\/p>\n\n\n\n
The Fede\u00adral Fis\u00adcal Court (BFH) dis\u00admissed the claimant\u2019s appeal and upheld the lower court\u2019s ruling in its enti\u00adre\u00adty. The key fin\u00adding is clear: assets of the parent com\u00adpa\u00adny, i.e. the clai\u00admant, can\u00adnot be allo\u00adca\u00adted for tax pur\u00adpo\u00adses to a divi\u00adsi\u00adon of the sub\u00adsi\u00addia\u00adry, not even as so-cal\u00adled \u2018dis\u00adcre\u00adtio\u00adna\u00adry busi\u00adness assets\u2019.<\/p>\n\n\n\n
The reason lies in the fun\u00adda\u00admen\u00adtal prin\u00adci\u00adple of the group of com\u00adpa\u00adnies. Alt\u00adhough the inco\u00adme of the sub\u00adsi\u00addia\u00adry is attri\u00adbu\u00adted to the parent com\u00adpa\u00adny, the sub\u00adsi\u00addia\u00adry remains the inde\u00adpen\u00addent enti\u00adty for the pur\u00adpo\u00adses of deter\u00admi\u00adning its inco\u00adme. Its los\u00adses are cal\u00adcu\u00adla\u00adted exclu\u00adsi\u00adve\u00adly on the basis of its own assets and acti\u00advi\u00adties. This does not chan\u00adge even if seg\u00adment accoun\u00adting is car\u00adri\u00aded out at the level of the parent com\u00adpa\u00adny. The los\u00adses incur\u00adred by V\u2011GmbH in its cul\u00adtu\u00adral divi\u00adsi\u00adon must the\u00adr\u00ade\u00adfo\u00adre not be set off against ren\u00adtal inco\u00adme deri\u00adved from pro\u00adper\u00adties owned by the clai\u00admant which do not ser\u00adve the cul\u00adtu\u00adral enterprise.<\/p>\n\n\n\n
This ruling is of con\u00adsidera\u00adble signi\u00adfi\u00adcan\u00adce for orga\u00adni\u00adsa\u00adti\u00adons ope\u00adra\u00adting in the local aut\u00adho\u00adri\u00adty sec\u00adtor that are struc\u00adtu\u00adred as groups of com\u00adpa\u00adnies and run busi\u00adnesses that con\u00adsis\u00adt\u00adent\u00adly make a loss. This approach does not allow for the tax-effi\u00adci\u00adent cross-sub\u00adsi\u00addi\u00ads\u00ada\u00adti\u00adon of los\u00adses ari\u00adsing from cul\u00adtu\u00adral or social acti\u00advi\u00adties using inco\u00adme gene\u00adra\u00adted from the parent company\u2019s own assets.<\/p>\n\n\n\n
Com\u00adpa\u00adnies with simi\u00adlar struc\u00adtures should have their tax arran\u00adge\u00adments careful\u00adly review\u00aded. The boun\u00adda\u00adries bet\u00adween the indi\u00advi\u00addu\u00adal taxa\u00adble enti\u00adties within a group of com\u00adpa\u00adnies remain in place even when accounts are pre\u00adpared on a divi\u00adsio\u00adnal basis. To assess your own situa\u00adti\u00adon accu\u00adra\u00adte\u00adly, it is advi\u00adsa\u00adble to seek advice from a tax specialist.<\/p>\n\n\n\n