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Forfeiture of tax loss carry-forwards in case of changes of shareholders is unconstitutional

  • Germany


    In a decision dated 29 March 2017 (file ref. 2 BvL 6/11) – published as part of the press release dated 12 May 2017 – the German Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) found Sec. 8c para. 1 sent. 1 of the German Corporation Tax Law (Körperschaftssteuergesetz, KStG) to be unconstitutional. This concerns all changes of shareholders of not more than 50% in the period between 01 January 2008 and 31 December 2015 which so far had a detrimental effect on tax loss carry-forwards and losses.

    The provision of Sec. 8c para. 1 sent. 1 KStG states that in case of a direct or indirect transfer of shares in an incorporated company of more than 25% (and not more than 50%) to a new shareholder within five years, tax loss carry-forwards for the company will be forfeited with future effect. This applies to all types of changes in shareholding, in particular by transfer, new entry through a capital increase, changes of voting rights. It also applies to all indirect changes, i.e. changes in a shareholding chain. Furthermore, the shares do not necessarily have to be transferred to a person (or company). A transfer to several persons (or companies) is sufficient if they pursue similar interests.

    This provision causes problems both in connection with shareholdings in companies and restructurings of groups of companies. Its effects far exceed the primary purpose intended by the legislator. The primary aim of the provision is to reduce trading in loss-making companies (shares in "empty" shell companies with loss carry-forwards); it should not be possible to trade in loss carry-forwards as if they were assets. The legislator has become aware that the provision reaches too far and has been correcting Sec. 8c over the years by adding the "group clause" and the "hidden reserves clause". The intention behind these clauses is that loss carry-forwards should remain in place under certain circumstances in case of restructurings within the group and that loss carry-forwards should not be forfeited if there are sufficient hidden reserves.

    However, the German Federal Constitutional Court regarded the group clause and the hidden reserves clause as insufficient to remove the unconstitutionality of the provision.

    The legislator is now obliged to provide a new regulation by 31 December 2018, which will have a retroactive effect for the years 2008 to 2015. If a new regulation is not provided, the provision will become null and void as of 01 January 2019.

    The Federal Constitutional Court has already indicated what a new regulation could look like. When read together with Sec. 8d KStG, which was introduced at the end of 2016 with effect as of 01 January 2016 and pursuant to which a loss carry-forward will not be forfeited if the business is continued, the loss limitation provision of Sec. 8c KStG was not necessarily unconstitutional for the same reasons.

    Until the new regulation comes into force, any tax assessment notices affected by Sec. 8c para. 1 sent. 1 KStG should not be made final so that they can still be changed.

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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