Federal Constitutional Court Clarifies Tax Deduction Rules for Corporate Groups: What Changes in 2025

In early December 2025, the Federal Constitutional Court of Germany (Bundesverfassungsgericht) issued a landmark ruling with significant implications for corporate groups, holding companies, and firms with intra-group agreements. The court essentially confirmed that the absence of a written contract between related companies cannot automatically justify denying tax deductions, provided that the actual execution of the transaction can be proven.

This decision sends a strong signal for the business community, as it touches one of the most sensitive areas — the tax treatment of intra-group transactions.

Why the Question of Written Form Arose

Many companies, especially within holding structures, operate based on long-term business relationships. Financing subsidiaries, providing services, allocating costs, or managing liquidity often relies on informal agreements. In practice, written contracts are not always used; sometimes internal policies, accounting memoranda, or established group procedures are sufficient.

German tax authorities often interpreted the absence of a formal contract as grounds for disallowing expenses. Their reasoning was: if no written contract exists, the transaction terms are not transparent, and the economic justification is unproven. As a result, companies faced additional tax assessments even when transactions were genuinely executed and economically meaningful.

What the Bundesverfassungsgericht Decided

The court clarified that a written contract is not a mandatory requirement for recognizing expenses in intra-group transactions. The key consideration is the facts of the transaction, not formalities.

Key takeaways:

• Taxpayers can substantiate intra-group transactions with various evidence, including payment documents, correspondence, reports, performance records, or economic calculations.
• Actual fulfillment of obligations takes precedence over formal requirements if the transaction adheres to market conditions (arm’s length principle).
• Automatically denying deductions due to the absence of a written contract violates the principle of equality and can unfairly burden businesses.

In short, tax authorities can no longer rely solely on the lack of documentation—they must evaluate the substance of the transaction.

Implications for Companies

The ruling strengthens the legal position of corporate groups whose intra-group operations are based on actual arrangements. It reduces risks during tax audits and limits the possibility of arbitrary disallowances.

Practical Theses for Businesses

• The actual execution of a transaction is more important than its formal documentation. If a service is provided, assets are transferred, or financing is granted, this should be documented using available means such as payment records, internal reports, or correspondence.
• The economic rationale of the transaction must be transparent. Even without a written contract, cost calculations, functional descriptions of departments, and proof of adherence to market conditions should be available.
• Written contracts remain a useful tool for reducing risks and simplifying audits, but their absence is no longer critical.
• For internationally structured groups, it is especially important to review internal processes and document the actual execution of cross-border transactions, financing, and services within the group.

Conclusion

The Federal Constitutional Court’s ruling represents an important step toward a more flexible and practical approach to tax oversight within corporate groups. The focus has shifted from formalities to the substance of transactions. For businesses, this means lower risks and greater predictability—provided that the reality and economic nature of the transaction can be demonstrated.