Contracts between related parties - The importance of the written form for tax recognition
Contractual relationships between related parties are often the focus of external tax audits; this is because, in view of the close relationship, they harbour increased potential for abuse. According to settled case law, the tax recognition of such contracts requires that they are both agreed in a legally effective way in terms of civil law and also actually implemented, and that they satisfy the arm's-length test. However, in practice, the failure to obtain recognition is frequently already due to the fact that the agreements were not recorded in writing. A recent decision by the Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) is a reason to reassess the importance of the written form for contracts between related parties.
In its ruling of 27.5.2025 (case reference: 2 BvR 172/24) the Federal Constitutional Court clarified that the mere absence of a written contract was not sufficient to deny tax recognition of a contractual relationship between related parties within the meaning of Section 15 of the German Fiscal Code. The starting point for the tax assessment of contracts between related parties is the principle that these may only be recognised if their contents, implementation and arrangements are consistent with those that would be normal between unrelated third parties. If the agreed terms and conditions deviate significantly in an arm's length comparison, or if the services owed are not actually rendered then the contract would lack effectiveness for tax purposes. In such cases, the contractual relationship would not be relevant for tax purposes.
However, in administrative practice, the absence of a written contract is frequently put forward as decisive evidence against tax recognition. The BVerfG has now clearly rejected this. It stressed that neither the law nor the principle of equal treatment under Article 3, paragraph 1 of the German Basic Law give rise to a written form requirement for contracts between related parties. The determining factor is rather an overall assessment of the actual circumstances. The financial administration may not refuse tax recognition solely because the parties did not record their agreement in writing.
The relevant aspect here is rather whether the contracting parties have actually executed the contract as agreed and whether it is possible to determine all the terms of the contract - especially the type, scope and remuneration of the services - sufficiently clearly and comprehensibly. Therefore, verbal agreements may likewise be recognised for tax purposes provided that their actual implementation has been proven and they have satisfied the arm's-length test.
