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.
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