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| Alexander Linn |
Earlier this year (see July update), Germany's Federal
Constitutional Court held that the German change-in-ownership
rules relating to loss carry-forwards partially infringe the
German Constitution, and must be amended with retroactive
effect. The judgment, however, only dealt with transfers of
more than 25% and up to 50% of the shares in a company that has
loss carry-forwards. According to the rules, such transfers
result in a pro rata forfeiture of the tax loss and interest
carry forwards, while a transfer of more than 50% of the shares
results in a complete forfeiture of all available
carry-forwards.
While the court has held that the rules are unconstitutional
for transfers between 25% and 50%, the court did not provide an
opinion on the constitutionality of the rule resulting in a
full forfeiture of loss carry-forwards following a transfer of
more than 50% of the shares. Already by that time, a separate
procedure on transfers of more than 50% was pending before the
Federal Tax Court. Before that case was decided by the Federal
Tax Court, however, the Fiscal Court of Hamburg (case 2 K
245/17) now has referred a separate case to the Constitutional
Court.
The details of the case have not yet been published. In any
case, the German Federal Constitutional Court will now have to
decide on the commercially much more important element of the
rule. Experience has proven that only a limited number of
transactions resulted in a partial forfeiture of loss
carry-forwards following a transfer between 25% and 50% of the
shares (especially since all transfers to the same purchaser
within a five-year period are added up when testing the rule).
The majority of cases at stake involved transfers of more than
50% of the shares, resulting in a full forfeiture of the loss
carry-forwards. On the one hand, the full forfeiture of loss
carry-forwards is a more severe consequence than a partial
forfeiture, so it could be argued that the potential
infringement of the Constitution is even more obvious for
transfers between 25% and 50%. On the other hand, one main
argument for the unconstitutionality used by the Constitutional
Court when deciding on the rule for partial loss forfeitures
was the lack of control gained over the loss carry-forwards by
the purchaser. While the transfer of a majority shareholding
involves some element of control over the loss carry-forwards
of the entity, such control cannot be assumed upon a transfer
between 25% and 50%. If this difference will be decisive for
the Constitutional Court when deciding on this new case remains
to be seen.
Taxpayers should ensure that tax assessment notices for the
2008-2015 period that are not considered preliminary, pending a
decision of the Constitutional Court, should be kept open in
order to be able to benefit from a potentially favourable court
decision.
Alexander Linn (allinn@deloitte.de)
Deloitte
Tel: +49 89 29036 8558
Website: www.deloitte.de