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Tax & Legal

Exemption of loss forfeiture for troubled businesses illicit state aid?


The exception of the German loss restriction rules for acquisitions in the course of a rescue operation to save a troubled business was held by the European General Court as a selective measure as it favours certain companies – those in financial difficulties – over their competitors in the marketplace. Two cases were brought to the ECJ for final clarification. The advocate general in one of the cases now proposes that the ECJ overturn the judgment of the General Court to the extent that it dismissed the action as unfounded.

In 2009 in a reaction to the economic crisis, the government introduced a temporary exemption (salvage clause) for share acquisitions to enable corporate recovery in Sec. 8c (1a) CTA substituting the former regulations in Sec. 8 CTA (old). Its stated objective is to facilitate the preservation of the business in a substantially unchanged form of a company in difficulties. The European Commission saw it as indiscriminate state aid and ordered the German government to disapply it for the future and in retrospect. The government protested, but lost its case before the European Court of Justice (ECJ) on a procedural point following a missed deadline. However, two taxpaying companies sued the Commission in their own names, having suffered the withdrawal of a binding ruling confirming their future entitlement to loss offset despite a “harmful” change of shareholders. In the first instance both companies lost before the General Court which – on February 4, 2016 – confirmed the view of the Commission. As a result, the cases were brought to the ECJ for final decision.

An ECJ advocate general in one of the cases has now suggested the court overturn the judgment of the General Court of 4 February 2016 in case T‑287/11, Heitkamp BauHolding v Commission, to the extent that it dismissed the action of the company as unfounded. The advocate general is convinced that the General Court erred in determining the so called reference system, i. e. the definition of the normal tax system, while answering the question whether Sec. 8c (1a) CTA is a selective (thus prohibited) and illicit state aid.

In order to classify a tax measure as selective, the ordinary or normal tax system applicable in the Member State (“reference system”) must be identified. First, the general loss carry-forward for companies under Sec. 8 (1) CTA applies to all companies. It reflects the principle that taxpayers are taxed on the basis of their ability to pay. Second, the rule governing the forfeiture of losses in Sec. 8c (1) CTA, is an exception to that rule because it excludes the acquisition of certain shareholdings (25% or over) from the scope of the general rule. Third, the salvation clause, as set out in Article 8c (1a) CTA, excludes specific scenarios from the scope of the loss forfeiture.

As a matter of fact, the “reference system” applicable here is the unlimited loss utilization and Sec. 8c (1a) CTA – being a part thereof – is not a selective measure. The Commission and the General Court wrongly see a difference between the “salvation clause” in Sec. 8c (1a) CTA and its predecessor, i. e. the “old” salvation clause under Sec. 8 (4) CTA (dealing with the loss restriction for “empty-shell companies”). The difference of both rules are only of formal nature since the “old” salvation clause was part of the overall loss expiry rules and Sec. 8c (1a) CTA was only later incorporated in Sec. 8c CTA as a separate rule. The advocate general went on to say that the salvation clause simply limits the scope of the rule governing the forfeiture of losses. Therefore, the salvation clause forms an inseparable part of the general rule, namely the loss carry-forward rule.

The ECJ case reference C-203/16 P Andres (faillite Heitkamp BauHolding) v Commission opinion of 20 December 2017