The Federal Ministry of Finance (BMF) has published a draft bill for the Annual Tax Act 2026. The draft introduces various adjustments to (amended) legal and case-law provisions. In addition to a provision under income tax law concerning the allocation of the purchase price upon the sale of developed land (in future Section 6f of the Income Tax Act (EStG)) and numerous other amendments, it also contains new provisions on VAT group status. According to the draft (UStG-E), this is to be regulated in future by a new Section 2c of the Value Added Tax Act (UStG). However, the substantive requirements for a VAT group remain unchanged. Section 2c(1) of the Draft Value Added Tax Act (UStG-E) continues to require financial, economic and organisational integration into the parent company’s business, as assessed on the basis of the overall picture of the actual circumstances. It is now clarified, however, that partnerships may also be subsidiary companies.
A new provision to be noted by those affected is that in Section 2c(1), third sentence, of the UStG-E: according to this, the consequences of the group of companies shall only apply if the parent company has submitted a corresponding declaration to the competent tax office. There is therefore a right of option. The effects of the group of companies are then also limited to the parent company named in the declaration and the subsidiary companies named therein. Conversely, the cessation of the conditions for the group of companies must henceforth also be declared without delay. The Federal Ministry of Finance (BMF) has also outlined details of the procedure through corresponding amendments to the Value Added Tax Regulation (UStDV) (in future Section 1 of the Draft Value Added Tax Regulation (UStDV-E)). It is important to note that the declaration has no retrospective effect.
Section 2c(2) of the UStG-E is intended to contain a corrective provision for cases in which a declaration has been submitted incorrectly, i.e. where the conditions for a group of companies are not actually met. In such cases, the tax authorities are authorised to determine the correct tax consequences for all participating group companies and the parent company. The provision thus ensures that, in the event of a change to the tax assessment issued to one party within the group, the correct tax consequences can be applied to the other parties within the group, and that facts are neither overlooked nor taken into account more than once. This is accompanied by a suspension of the limitation period for tax assessment: the correct tax consequences may still be applied to all parties within one year of the incorrect tax assessment relating to the purported group of companies having been issued, revoked or amended.
Upon application by all parties to the group, the incorrectly recognised group may be disregarded if this does not result in any loss of tax revenue, i.e. where the VAT liability and input tax deduction of the companies concerned are identical (Section 2c(3) of the Draft Value Added Tax Act (UStG-E)). The application must be submitted to the tax office responsible for the taxation of the (alleged) parent company. This is intended to avoid unnecessary administrative burdens, which would arise, amongst other things, from the correction returns, without any change to the tax revenue.
Furthermore, to provide safeguards, a specific liability provision is to be included in Section 2c(5) of the Draft Value Added Tax Act. Under this provision, the parent company would be liable for all taxes arising from the changes following the discovery of an incorrectly assumed group of companies. The subsidiary would – in cases of intentional or negligent breach of its obligations – be liable for the taxes arising in relation to the parent company, insofar as the erroneously assumed group structure was a significant factor in this regard. This is intended to prevent a situation where refund claims against one party have to be paid out, whilst claims for additional tax payments against other group members can no longer be recovered.
However, reassurance can be given insofar as the effects of the legislative amendments are not due to take effect until 1 January 2029, thereby ensuring a certain transitional period (Section 27(42) of the draft Value Added Tax Act).
Practical guidance:
Should the draft bill be enacted into law, companies will be required, from 1 January 2029, to actively declare their intention to form a VAT group. As the declaration has no retroactive effect but applies only from the date of application onwards, the relevant applications should be submitted before 1 January 2029. Care must be taken to ensure that the application correctly lists all affiliated companies. As things stand, the following details must be provided for the parent company and group members:
- name, place of residence, registered office or, if there is no registered office in Germany, the location of the permanent establishment,
- tax number and economic identification number (Section 139c of the German Fiscal Code) – where assigned –,
- VAT identification number – where assigned –
- the date on which the group of companies came into effect,
- in the case of a parent company with its management abroad, the economically most significant part of the business in Germany.
According to the wording of the Act, the scope of the group of companies may also be limited by the declaration. This could give rise to tax planning opportunities by designating only selected companies as group members.
In any event, this option would prevent unrecognised tax groups from arising and, in such cases, would allow the VAT consequences that have already taken effect to be reversed retrospectively.