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Tax & Legal

Present rules for full forfeiture of loss relief where more than 50% of the shares are transferred also unconstitutional?


On 29 August 2017, the Lower Tax Court of Hamburg referred a further request to the Constitutional Court on the constitutionality of the rules on the full forfeiture of loss relief under Section 8c 2nd Sentence of the Corporation Tax Act, namely where more than 50% of the shares in the loss making company are transferred (second alternative of Sec. 8c Corporation Tax Act). The Lower Tax Court is convinced that this rule is also unconstitutional.

Share transfers of more than 25 % but no more than 50 % are unconstitutional

On 29 March 2017 the Constitutional Court held (case ref. 2 BvL 6/11) that Sec. 8c sub-sec. 1 sentence 1 of the Corporation Tax Act (CTA) – dealing with changes of more than 25% and up to 50% of the shares in a company within a period of five years – is unconstitutional as there is no justification for the unequal (different) treatment of companies in cases of a harmful change of ownership, i. e. where more than 25% but no more than 50% are transferred (alternative 1 of Sec. 8c CTA) and the loss carry forward is then reduced in proportion to the transfer. The case was referred by the Lower Tax Court of Hamburg. In the opinion of the Constitutional Court there was no plausible reason to assume a (harmful) change of identity of the company without taking further into account the business assets and / or the type of business of the company. In its judgment at the time the court left it open whether this should be judged differently in situations where more than 50% of the shares are transferred (alternative 2 of Sec. 8c CTA).

Further referral to Constitutional Court regarding share transfers of more than 50 %

Most recently, though, the Lower Tax Court of Hamburg referred to the Constitutional Court questions with regard to the rules on the full forfeiture of loss relief under Section 8c 2nd Sentence CTA, specifically where in a five year period more than 50 per cent of the shares change ownership. The Lower Tax Court is convinced that this rule is also unconstitutional.

The full written document of the lower tax court has now been made available. In its resolution the court follows in full the earlier judgment 2 BvL 6/11 of the Constitutional Court on alternative 1 of Sec. 8c CTA. The curtailment of loss relief is solely dependent on the situation of the shareholder and does not sufficiently take into account the company’s personal ability to pay. In other words: The court sees no plausible reason to assume a (harmful) change of identity of the company without taking further into account the business assets and / or the type of business of the company. The court does not see any justification for this. Even more so, as Sec. 8c CTA is not a pure anti-abuse restriction but also covers “normal” changes of shareholders and thus is more of a general restriction. The effects of Sec. 8c CTA are felt to be too far reaching, as the rules come into play as a consequence of any form of share transfer. Typically, the identity of the company is not lost solely if more than 50 % of the shares are transferred. Moreover, it cannot be assumed from the outset that the influence of the acquirer of the shares would equally result in a change of the company as such. The reasons for a change of shareholders are manifold and a change of identity can ultimately only be judged on the basis of the measures actually taken by the shareholders.

Source: Lower Tax Court of Hamburg, resolution of 29 August 2017 (2 K 245/17); official press release of 18 October 2017