German VAT and profit-transfer tax regulation

The German tax landscape regarding VAT and profit-transfer arrangements (Organschaft) has undergone significant tightening through judicial rulings and proposed legislative reform.

Earlier rulings by the German Federal Fiscal Court (Bundesfinanzhof) established stricter compliance standards. One decision clarified that entrepreneurs using accrual accounting can only treat remuneration as uncollectible for VAT purposes under specific conditions involving contractual warranty retentions. Another ruling mandated that profit-transfer obligations must be fulfilled within twelve months of becoming due, noting that merely recording amounts on a clearing account is insufficient to maintain Organschaft status.

Building on these requirements, the German Federal Cabinet has approved a draft of the Annual Tax Act 2026. This reform, scheduled for implementation on January 1, 2029, intends to replace the current automatic VAT fiscal grouping system with an explicit declaration model. Under this new framework, companies must actively declare groupings to tax authorities via a new section in the VAT Act, rather than having them established automatically. This shift aims to increase legal certainty and allow corporations to better manage liability risks during restructurings.