German Constitutional Court Declares Parts of Provisions Regarding Forfeiture of Tax Losses and Loss Carry Forwards Unconstitutional

by Shearman & Sterling LLP
Contact

The German Constitutional Court held in its decision dated 29 March 2017 (published on 12 May 2017) Section 8c sentence 1 German Corporate Income Tax Act (KStG) (introduced in 2008 and replaced by the identical provision of Section 8c para. 1 sentence 1 KStG) to be unconstitutional.

The provisions in question provide for a proportional forfeiture of current tax losses and tax loss carry forwards (Untergang von steuerlichen Verlusten und Verlustvorträgen) if more than 25% but less than 50% of the shares in a German corporation are directly or indirectly transferred to a new shareholder or a group of shareholders with aligned interest (harmful share transfer). The court held that there were no objective reasons for a different tax treatment of corporations in case of such a harmful share transfer. In particular, the aim of avoiding legal but undesired tax optimizations did not justify the broad and undifferentiated scope of these provisions. Further, the exemptions for intra group transactions and built in profits that had been introduced since 2008, did, according to the court, not change the situation.

The decision of the German Constitutional Court only applies to share transfers up to 50%. It further applies only to the years 2008 through 2015. In 2016 – as an exemption to § 8c KStG – a new Section 8d KStG was introduced according to which under certain conditions tax loss carry forwards and current losses shall not get lost if the loss-making business has remained unchanged for a certain period of time. The court left it open whether this exemption may result in § 8c KStG having been in line with the Constitution since 2016.

Section 8c para. 1 sentence 2 KStG, which provides for a full forfeiture of losses and loss carry forwards in case of a transfer of more than 50% of the shares, should therefore not be affected by the court decision. The court rather based its decision inter alia on the argument that in cases where less than 50% of the shares are transferred, the respective new shareholder would not be in the position to control the company and to change its business in a way that allows an optimized use of loss carry forwards. This statement indicates that the court may have a different view on the constitutionality of a forfeiture of losses and tax loss carry forwards in cases of a real change of control (above 50%).

The legislator is now called by the court to amend or replace § 8c KStG until the end of 2018, otherwise the respective parts of Section 8c KStG will become retrospectively null and void from 2008 onwards. Courts and the administration shall not apply the respective provisions; ongoing tax proceedings shall be deferred.

The decision of the Constitutional Court may have a considerable impact on the tax situation of companies which were part of transactions with investors injecting fresh capital or aquiring shares and became minority shareholders. In particular venture capital companies and German medium-sized companies with external investors may benefit from the decision and the new law.

It is to be expected that the legislator will amend § 8c KStG and limit its scope, e.g. to abusive cases. Due to such limitation tax losses and tax loss carry forwards which have been treated as already been forfeited under § 8c sentence 1 KStG/§ 8c para. 1 sentence 1 KStG will have survived a harmful share transfer in a majority of cases, because the new law would retroactively apply to any tax assessment which has not been finally assessed.

In order to benefit from the new law German corporations concerned should therefore appeal against respective tax assessments in order to keep them open until the new law comes into force.

Written by:

Shearman & Sterling LLP
Contact
more
less

Shearman & Sterling LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.