Germany: Loss relief deferral unconstitutional?

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Germany: Loss relief deferral unconstitutional?

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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

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