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Under German law, a subsidiary giving up profits to the parent company isn't an ordinary business transaction. It's typically covered by a profit and loss agreement, which sets up the formula for how much profit should be transferred each year. The formula also covers the transfer of funds if the parent company reimburses subsidiary losses.
Why an Agreement
The Deutsche Bahn Group says the profit transfer agreements are necessary to protect shareholder rights. Shareholders in the parent company are entitled to benefit from corporate profits, including the profits made by subsidiaries. However, the parent-company owners also have an obligation to cover subsidiary losses. The agreement sets the rules in writing, rather than having the company directors make the decision every year. The minimum length of an agreement is five calendar years.
Operating without a profit transfer agreement has tax consequences. The agreement shows the two companies have "fiscal unity," which allows the parent company to report the subsidiary's profits as its own taxable income. Under German law, this allows the parent to write off some of its interest expense against the subsidiary's income. If the companies don't have an agreement, they don't have that benefit.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.