Germany: Federal Constitutional Court finds change-in-ownership rules partially 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: Federal Constitutional Court finds change-in-ownership rules partially unconstitutional

Court Hammer pixelbay free copyright thumb

Germany's Federal Constitutional Court has ruled that the German change-in-ownership rules relating to loss carryforwards partially infringe the constitution, and must be amended with retroactive effect.

Linn

Alexander Linn

Under the change-in-ownership rules that have applied from 2008, a direct or an indirect transfer of more than 25% (and up to 50%) of the shares of a company that has loss carryforwards results in a pro rata forfeiture of the tax loss and interest carryforwards; and a transfer of more than 50% of the shares results in a complete forfeiture of all available carryforwards. There are three exceptions to the loss forfeiture rules: the intragroup restructuring exception and the built-in-gains exception (which have applied since 2010), and the business continuation exception (introduced in 2016).

The case before the court involved a direct transfer of between 25% and 50% of a company's shares in a year where no exception applied, so the transfer resulted in a partial forfeiture of the taxpayer's tax loss carryforwards. The court concluded that the rules violate the constitutional principle that companies should be taxed on their financial performance. The legislative intent to prevent loss trafficking by using 'empty loss companies' may be an acceptable justification for an exception to this principle, but a partial forfeiture of loss carryforwards where there is a change in shareholders of between 25% and 50% is considered too broad and cannot be used to deem the taxpayer's behavior to be abusive. The court also clarified that the introduction of the intragroup restructuring and the built-in-gains exceptions to the change-in-ownership rules do not affect its analysis. However, the business continuation exception introduced from January 1 2016 potentially could change the analysis because, under this exception, the taxpayer may be permitted to demonstrate the lack of any abusive intent for the share transfer. The court, therefore, limited the scope of its decision to the period January 1 2008 through to December 31 2015.

The court did not opine on the constitutionality of the rule resulting in a full forfeiture of loss carryforwards following a transfer of more than 50% of the shares, so this decision will not affect those transfers. However, it should be noted that another case involving transfers of more than 50% is pending before the federal tax court.

The Constitutional Court has asked the German legislature to draft and implement an amended change-in-ownership rule that is in line with constitutional principles by December 31 2018, and that would apply retroactively from January 1 2008 through to December 31 2015. If the rules are not amended within this timeframe, the change-in-ownership rules for ownership transfers of between 25% and 50% of the shares in a company automatically will become void on January 1 2019 for the 2008-2015 period.

Taxpayers should ensure that tax assessment notices for the 2008-15 period that are not considered preliminary pending a decision of the Constitutional Court, should be kept open to be able to benefit from the court's decision.

Alexander Linn (allinn@deloitte.de)

Deloitte

Tel: +49 89 29036 8558

Website: www.deloitte.de

more across site & shared bottom lb ros

More from across our site

AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Gift this article