Germany: Loss relief deferral unconstitutional?

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: Loss relief deferral unconstitutional?

miles.jpg

Andrew Miles

A company's sole purpose was to own and manage an investment project on behalf of a provincial government. However, its principal refused to accept responsibility for the losses and a lengthy legal battle began. At one point the company's position at court appeared hopeless and it wrote off its claim. This led to a large loss in the accounts and to the realisation that the government would no longer accept the company as a business partner. Faced with the loss of its business, it went into liquidation. In the event, the liquidator was more successful at court than the previous management and ultimately won the case. This resulted in a liquidation profit roughly equal to the loss brought forward. At this point the minimum taxation rule took effect with the consequence that basically only 60% of the loss brought forward could be offset against current income. Since the liquidation assessment is necessarily the final assessment in a company's lifetime, the remaining loss carry-forward lapsed. The company argued that the minimum taxation provision was an unconstitutional offence against the guarantee of unfettered ownership. The Supreme Tax Court accepts the minimum taxation provision as being within the constitution in the normal course of events. The primary effect was deferral in the legitimate interests of securing public finance. Even the confiscatory effect of taxing part of the profit earned in a final period while allowing a remaining loss carry-forward to lapse unused did not offend against the constitution. The guarantee of unfettered ownership is not a guarantee of business success. However, the court sees the present case as something of an exception in that the cause of the loss and the cause of the profit – write-down and write-back of a receivable – are inseparable. The profit is the consequence of the loss and to treat it differently to the permanent disadvantage of the taxpayer is to breach the constitutional demand for equal treatment of like circumstances. The matter has now been referred to the Constitutional Court for a final decision.

Andrew Miles (andrew.miles@de.pwc.com)

PwC

Tel: +49 69 9585 6345

Website: www.pwc.de

more across site & shared bottom lb ros

More from across our site

The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Rafael Tena tells ITR about the ‘crazy’ Mexican market, ditching the hourly rate, and refusing to grow his fledgling firm in an ‘unstructured way’
It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Gift this article