Deductibility of legal and consulting costs for share sales within the group
When determining the income of taxable entities, capital gains from investments in other entities and associations of persons are not taken into account. However, 5 % of these gains are considered non-deductible operating expenses, meaning that 95 % of such capital gains are effectively tax-exempt (Section 8b (2) and (3) of the German Corporate Tax Act (Körperschaftsteuergesetz; KStG)). Therefore, capital gains incurred in the course of share sales and deductible from the sale price have only a minor impact. In contrast, the Fiscal Court Düsseldorf clarified in its decision of February 26, 2025 (case no. 7 K 1811/21 K) whether fully deductible operating expenses exist if they are attributable to the parent company of the group rather than to the selling company.
There was an income tax group between a parent company and its wholly owned subsidiary. As a member of the income tax group, the subsidiary sold its shares in a sub-subsidiary in the disputed year 2011. The legal and consulting services related to this sale of shares (including drafting and negotiating the term sheet, setting up the data room, drafting the purchase agreements, and supporting the contract negotiations) were commissioned by the parent company as the controlling entity in its own name, and it bore the costs incurred. However, following an external audit, the tax office assessed these costs as disposal costs attributable to the selling subsidiary itself within the meaning of Section 8b (2) KStG and ultimately only took 5 % of them into account as part of the capital gain. The parent company, on the other hand, sought a full deduction of operating expenses in the amount of the legal and consulting costs actually incurred. This has now been confirmed by the fiscal Court.
In its opinion, the tax deductibility of legal and consulting costs is not precluded by the deduction restrictions of Section 8b KStG. The application of Section 8b (2) KStG requires the sale of own shares. However, the owner of the sold shares was not the parent company, but its subsidiary. The special regulations applicable to affiliated companies (Section 15 sentence 1 no. 2 KStG in conjunction with Section 14 KStG), according to which the profit is to be determined at the level of the subsidiary and then allocated to the parent company, were also not applicable, as the legal and consulting costs were not part of the daughter's income allocated to the parent company. The deduction prohibition in Section 8b (3) sentence 3 KStG for profit reductions related to the relevant shares in corporations was also not relevant. This is because only substance-related impairments are subject to this prohibition, but not all expenses economically related to the share.
Furthermore, based on the principle of ability to pay and cost bearing applicable in German tax law, the fiscal Court denied that the legal and consulting costs could be economically attributed to the subsidiary, deviating from the legal structure of the case. There was also no hidden contribution; there was no asset advantage at the subsidiary level that could be contributed. The assumption of the legal and consulting costs by the parent company merely represented an insignificant, non-contributable benefit of use.
These costs could not be attributed by way of an abbreviated contract or payment method either, as the parent company had commissioned and paid for the legal and consulting services in her own name and on her own account. Furthermore, the parent company had no claim against her subsidiary for reimbursement of expenses. The parent company and the subsidiary had not concluded a corresponding agreement on the reimbursement of the costs of sale, and there is no legal obligation in this regard.
Notice:
The appeal against the ruling is pending before the German Federal Fiscal Court (case no. I R 7/25). As far as can be seen, this is the first opportunity for the court to assess the controversial legal question of whether legal and consulting costs incurred in the course of the sale of shares in a subsidiary of a group are fully deductible as operating expenses at the level of the parent company if the latter is invoiced accordingly and bears those costs. A clarification by the highest court is particularly welcome for share sales within a group of companies. However, corresponding tax-advantageous structuring options can only be advised after and depending on the appeal decision of the German Federal Fiscal Court. Currently, such cases should be kept open with reference to the pending appeal proceedings.
