Section 10(d) of the EStG stipulates a minimum taxation that works as follows: if a net annual loss arises, it may be carried back to the previous fiscal year up to an amount of €1 million. If the loss is still not neutralised after that, it is carried forward into future fiscal years. Once the company makes a surplus, the minimum taxation rule prevents it from instantly setting off all accumulated losses against new surpluses. Instead, usage of carry-forward losses is capped at 60 per cent for each fiscal year. Only the first million of losses can be offset without limitations. For example, a company with a surplus of €10 million in 2016 and an equal amount of carry-forward losses has a taxable income of €3.6 million, which may be called the minimum taxable income. The remaining losses are carried on until they are used up. Forming a tax group can reduce the impact of the minimum taxation clause by eliminating losses within the group immediately instead of carrying them forward.
While the aforementioned limitations only defer the usage of carry-forward losses, additional rules pertaining to a change of control in share deals affect the very preservation of such losses. Acquiring a company’s shares eliminates carry-forward losses either proportionately (25.1 per cent to 50 per cent of shares acquired; anything less has no effect) or entirely (50.1 per cent and above) for purposes of corporate income and trade tax (section 8(c)(I) of the Corporate Income Tax Act (KStG) and section 10(a)(X) of the Trade Tax Act (GewStG)). Shares bought by a group of acquirers with common interests are added. The loss-elimination clause covers not only direct transfers of shares, but any similar type of transaction, leaving almost no room for a preservation of losses. However, the elimination does not kick in if the target and acquiring corporation entirely belong to the same group or if the target’s carry-forward losses exceed its existing hidden reserves.
Losses from one business year can be carried back to the previous year (restricted to amounts of up to € 1,000,000). Remaining losses are then carried forward, up to an amount of € 1,000,000 with no limitations, after that at a rate of 60 per cent of the remaining losses. The rest may be used in future years. The utilisation of losses is permitted in company groups under certain requirements. Existing losses carried forward are cancelled according to the rules in the Corporation Tax Act:
- in full if more than 50 per cent of the shares of a corporation are transferred within a period of five years; or
- proportionately to the amount of shares transferred if more than 25 per cent but less than 50 per cent of the shares in a corporation are transferred within a period of five years.
A special rule had been introduced into § 8c KStG in order to facilitate the preservation of losses during the takeover of a crisis-stricken company. This rule has been relaxed by new legislation in § 8d KStG concerning preservation of losses carried forward in cases of share transfers within groups of companies or if the business is continued without major changes.
Existing losses can be preserved in the course of a share transfer aimed at avoiding a company’s bankruptcy, if the business of the company is continued and either one of the following prerequisites is met (§ 8c KStG):
- a works council agreement on the restructuring scheme including provisions for the preservation of a certain number of jobs;
- in the five years following the share transfer, the company pays at least 400 per cent of the wages it has paid in the five years preceding the transfer; or
- the company’s equity is raised by at least 25 per cent of the company’s assets.
§ 8d KStG concerns the preservation of losses in a company in case of a change in ownership and the losses cannot be used otherwise. In cases where a new shareholder or a change in the shareholders is necessary for the continuity of the business and to receive proper financing, the losses carried forward may be preserved if the business of the company will be continued without major changes as far as the services or products, customers and suppliers, the markets served and the qualification of employees are concerned. Further restrictions apply as far as the business is concerned. The losses can be carried forward until they are fully used and no adverse event like the closing of the business or the implementation of new business activities occurs.
If the company realises profits in the course of a reorganisation due to a cancellation of debt, the tax authorities may grant a deferral and later a waiver of the taxes on these profits, but only after all net operating losses and losses carried forward have been used up to offset against these profits. That was an instruction of the Federal Ministry of Finance (‘restructuring decree’). With its judgment of 28 November 2016, the German Supreme Tax Court has decided that the restructuring decree is not compatible with the principle of legality of administration. The court dismissed the application of the restructuring decree and pointed out that the taxation of restructuring gains is only subject to the German tax law provisions. The conditions for a tax remission on equitable grounds, which are laid down in the restructuring decree, do not describe any case of objective unfairness within the meaning of articles 163 and 227 of the German Fiscal Code. In response to these judgments, the rules of the restructuring decree were introduced in a new section 3a in the German Income Tax Act. However, it will only enter into force on the day on which the European Commission decides that the new section 3a does not constitute a state aid within the meaning of article 107(I) of the Treaty on the Functioning of the European Union, or it is a state aid but compatible with the common market.
Tax credits (ie, withholding tax credits that have been accumulated before the acquisition) stay with the corporation even after a change of control. They are subject to the regular limitation periods.
In asset deals the tax losses accumulated by the target before the change of control can generally not be used by the acquirer in the future, because they always stay with the former shareholder or owner of the business.
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