The present curtailment of loss relief on changes of shareholders shall be modified to allow for a continued utilization of losses, provided the business operation does not change. The German government has taken the initiative and – for this purpose – agreed on a draft law. The respective draft was published on September 14, 2016.
The present rules for the curtailment of loss relief on changes of shareholder exist since 2008 (Section 8c Corporation Tax Act – CTA). The basic principle is that loss carry forwards (both for corporation tax and trade tax) cease if more than 50% of the shares in the company making the loss are directly or indirectly acquired by a single acquirer his related party over a period of five years. If more than 25% but no more than 50% are transferred, the loss carry forward is reduced in the proportion to the transfer. There are two exceptions of the curtailment of losses (i. e. despite of a change of shareholder): Loss carry forwards on certain group internal reorganisations are protected as well as losses up to the level of the hidden reserves of the company that would be taxable in Germany on release.
The effects of Sec. 8c CTA are far-reaching, as it comes into play as a consequence of any form of share transfer. In the course of time it was felt that there are still many aspects of the rules on loss curtailment that remain unclear und that the rules themselves were too restrictive. The German government obviously now felt that there might be situations in which the forfeiture of losses – from an economic point of view – is not at all justified. Namely where – after the change in shareholding – the survival and the continuity of the business operation of the corporation is ensured. For this matter the German cabinet (i. e. the government coalition parties) set up a draft of a new Section 8d CTA to deal with an extended loss utilization for corporations under which an offset of losses would still be possible under certain circumstances. The new rules should apply already from January 1, 2016.
The corporation must specifically and formally apply for the new rules. According to the new Sec. 8d CTA an acquisition is not harmful in the sense of Sec. 8c CTA if the same business was maintained during the three years preceding the change in shareholding or since inception. Moreover, the corporation thereafter must continue the same business operation uninterruptedly and unchanged. However, the exact duration of the continuation is neither established nor specified in the present proposal. Either the discontinuation (termination) or a change in the nature of business leads to the forfeiture of the loss carryforward, unless protected by hidden reserves of the company. Harmful events upon which the loss carry forward would no longer be preserved are: The termination of the business, changing the line of business or taking up new business, the participation of the corporation in a partnership, the corporation being the parent within a tax group, assets which are transferred to the corporation below fair market value. The loss relief mechanics of Sec. 8d CTA would also apply to the trade tax losses.
The draft will now be discussed (and perhaps modified) by the German parliament (the lower chamber of parliament – Bundestag) and then be brought before the representatives of the provinces (i. e. Bundesrat) who has the final vote.