In Germany, the use of losses realised by a corporation in previous or following taxation periods is restricted. At first, a carry back of losses is only allowed for (corporate) income tax purpose, but not for trade tax purposes and additionally limited to EUR 511,100.00. Furthermore, the carry forward of such losses – even in principle unlimitedly allowed – faces several obstacles.
However, based on a decision of the Federal Fiscal Court (I B 49/10 - 26 August 2010) concerning the suspension of the enforcement of a tax declaration in connection with the applicability of the "Minimum Taxation Rule" and a related, recently issued statement of the Federal Ministry of Finance (19 October 2011), there are good reasons to believe in beneficial changes in the nearer future.
Obstacles by using losses carried forward
1. Minimum Taxation Rule with respect to profits exceeding EUR 1,000,000.00
According to German income tax law, profits can unlimitedly be offset against losses carried forward only up to the amount of EUR 1,000,000.00. With respect to profits exceeding EUR 1,000,000.00 only 60% can be offset against losses carried forward. As consequence, 40% of profits exceeding EUR 1,000,000, if any, are in any event subject to income taxation even if the there is a sufficient amount of losses carried forward to offset the whole profit.
2. Forfeiture of losses carried forward
For corporations losses carried forward are among others linked to their shareholders in a way that the transfer of shares in the corporation can lead to the partial/full forfeiture of losses carried forward. As a result losses realised by a corporation can possibly not be offset against future profits in full due to the combination of the German Minimum Taxation Rule and a forfeiture of losses carried forward.
Decision of Federal Fiscal Court and Statement of Federal Ministry of Finance
On 26 August 2010, the Federal Fiscal Court ruled that the German Minimum Taxation Rule is generally in line with German constitutional law because the provision does not principally avoid the use of losses carried forward, but only partially shifts it. However, in cases in which in combination with the forfeiture of losses carried forward or similar events the rule leads to a definitive extinction of losses there are serious concerns with respect to the consti-tutionality of the provision.
As a consequence, the Federal Ministry of Finance has issued a statement on 19 October 2011 in which the tax offices are instructed to grant on a regular basis a suspension of the enforcement regarding such an amount of tax that is directly related to the Minimum Taxation Rule in some cases. According to the statement, a suspension of enforcement shall be granted if the Minimum Taxation Rule in combination with an additional actual or legal reason leads to a definitive disuse of losses.
Actual or legal reasons in this context are:
- a harmful transfer of shares in a corporation,
- a harmful transformation under German Transformation Tax Act, and
- a liquidation of a corporation.
Background of the decision of the Federal Fiscal Court was actually not the question whether the Minimum Taxation Rule is constitutional or not, but only whether the tax office has to grant a suspension of enforcement in this respect. Therefore, the degree of analysis was not that high as it would have been in a regular lawsuit.
However, taking into account the wording of the ruling of the Federal Fiscal Court and the reaction of the Federal Ministry of Finance, it is more likely than not that the Minimum Taxation Rule will directly be challenged in the course of the ongoing legal procedure.
Hence, in cases in which losses carried forwards will become unusable due to one of the abovementioned actual/legal reasons is recommended to appeal against all tax assessments for previous taxation periods in which the Minimum Taxation Rule applied and to ask for a suspension of enforcement. In addition, the potential non-applicability of the Minimum Taxation Rule in the described cases can be used as additional benefit in the course of business restructuring and similar measures.
Marcus Fischer, Associate, CMS Hasche Sigle
Dr Thomas Link, Partner, CMS Hasche Sigle