Tax & Legal

The Supreme Tax Court has held that a share exchange at nominal value leading to a transfer of hidden reserves abroad triggers a taxable capital gain for the transferring shareholder.

The ECJ has upheld a German rule providing for immediate taxation (but with a deferral option) of the capital gain inherent in the excess of the market over the book value of a business transferred to a corporation in exchange for shares where as a result of the transaction Germany would lose the right to tax the gain on any subsequent sale of the shares.

The profit from the sale of a share in the upper-tier partnership as prescribed in Section 7 sentence 2 no. 2 Trade Tax Act is not to be allocated to the hidden reserves of the upper-tier partnership and the hidden reserves of the lower-tier partnership. It is rather a single and uniform sales transaction at the level of the upper-tier partnership, the Supreme Tax Court said in a most recently published decision.

In a most recently published judgment, the Supreme Tax Court decided that exit taxation - a process in which hidden reserves of assets (built-in gains) are identified and taxed because otherwise Germany would lose its right of taxation - can, in principle, also occur through a mere change in the law (so called „passive“ exit taxation).

An ECJ advocate general has suggested the court rule that a German practice of allowing deferral of taxation on the hidden reserves (appreciation in value) in intangible assets transferred abroad is proportional and reasonable in the light of the overall need to ensure a fair distribution of taxing rights between member states.

The Hesse Tax Court has decided that the immediate taxation of a contribution gain pursuant to Section 22 (2) of the Reorganization Tax Act in conjunction with Section 17 of the German Income Tax Act violates the EU Merger Directive if it is applied on a general basis to cross-border contributions within a seven-year period. According to the court, this current provision wrongfully presumes an abusive sale of shares and leads to an impermissible retroactive taxation of hidden reserves.

An ECJ advocate general has suggested the court accept in principle the Dutch exit tax on business, but require deferment of the actual levy until the relevant assets are realised.

The Federal Constitutional Court held that § Section 6 (5) Income Tax Act providing for the transfer of business assets at book values to be incompatible with the German Basic Law insofar as it rules out a transfer at book value between partnerships with identical shareholding. This exclusion from the tax privilege is incompatible with the general guarantee of the right to equality and thus not justified.

On 30 November 2017, the Federal Ministry of Finance published the final version of its circular on the application of the loss forfeiture rules according to Section 8c of the Corporation Tax Act (CTA), including comments on the Hidden Reserve Clause and the Group Clause. This circular replaces the circular on this subject from 4 July 2008.

The Supreme Tax Court has held the tonnage tax hidden reserve of a shipping partnership to be taxable in Germany on the withdrawal of a Belgian partner from the partnership.

The ECJ held that the expatriate exit tax rule under Section 6 Foreign Tax Act contravened the principle of non-discrimination contained in the Agreement for the Free Movement of Persons between the EU and Switzerland.

Under certain conditions, changes in shareholders and the admission of new investors will in future be possible without giving rise to a forfeiture of losses carried-forward. On 23 December 2016 the Act for the Further Development of Tax Loss Utilisation for Corporations was published after having been adopted by the German Parliament (Bundestag and Bundesrat) on 20 December 2016.

The German Federal Ministry of Finance has commented on the tax consequences of a UK limited company which has been removed from the British register of companies (Companies House) after 31 December 2020.

On 13 December 2018 the Federal Ministry of Finance published a draft bill for the enactment of tax and other regulations for Brexit (“Brexit Bill”)designed to alleviate certain legal consequences arising by reason of Brexit alone.

In this issue: PwC Reports, Official Pronouncments, Supreme Tax Court Cases, From Europe and From PwC.

The Federal Ministry of Finance has sent the draft of a Ministry circular on the application of Section 8d of the Corporation Tax Act (CTA) – continuance-bound loss carry-forward after loss forfeiture - to the professional associations for comment.

The Supreme Tax Court has held that the value-based fee for a tax office ruling is to be based on immediate tax effects only, ignoring secondary consequences.

The ECJ has held the Portuguese taxation of the unrealised gains inherent in a company’s assets on change of corporate residence from Portugal to be an unjustified hindrance on the freedom of establishment.

The Supreme Tax Court has dismissed a claim by a retiring partner that his supplementary tonnage tax charge due be privileged as a form of capital gain on disposal of his partnership share.

In its judgement of 2 July 2025 ( XI R 27/22), the Supreme Tax Court ruled that a roll-over provision created incorrectly in accordance with Section 6b(3) of the Income Tax Act (ITA) must be corrected in accordance with the principles of formal balance sheet consistency.