Continuation of a trade loss even in the case of co-entrepreneurial participation
Continuation of a trade loss even in the case of co-entrepreneurial participation
A harmful acquisition of shares of more than 50 % leads to the forfeiture of unused losses in accordance with section 8c German Corporate Income Tax Act (CIT), unless the exceptions of the group clause (Konzernklausel) or hidden reserves clause (Stille-Reserven-Klausel) apply. There is a further exception with the application-dependent loss carry forward linked to continuation (Fortführungsgebundener Verlustvortrag, section 8d CIT), which is, however, subject to strict requirements. For example, the corporation is not allowed to have been involved in a co-entrepreneurship for a certain period of time prior to the acquisition of the shares. In its judgment of March 7, 2024 (case no. 9 K 382/23), the Düsseldorf Financial Court (FG Düsseldorf) has now taken the opportunity to clarify trade tax specifics in connection with the continuation-linked tax loss carry forward and to point out the extensive consequences of this rule.
The claimant GmbH held an interest in a limited partnership (KG) from 2011 until December 31, 2020. In 2021, the sole shareholder sold his shares in the GmbH to a third party. This undisputedly constituted a harmful acquisition of shares pursuant to section 8c CIT, which, according to the legal situation, would also have resulted in the forfeiture of the trade tax loss determined as of December 31, 2020. The tax office rejected the application submitted by the GmbH for a continuation-linked loss carry forward in accordance with section 8d CIT, as it had been involved in the KG - i.e., a co-entrepreneurship - for the last three years before the transfer of shares. However, the tax court confirmed the GmbH's argument that the exemption of the participation in a co-entrepreneurship regarding trade tax has an overriding effect that was not intended by the legislator.
This is because, according to the specific trade tax rules, the provisions of the CIT on the forfeiture of the tax loss carry forward are only to be applied “accordingly” and therefore must consider trade tax specifics. There is no risk of abuse in terms of trade tax due to the participation in a limited partnership, as the limited partnership as itself is the subject and debtor of trade tax. The company involved as a co-entrepreneur can therefore deduct the losses attributable to it by the KG. However, these are added back to the trade income when the trade tax is assessed. The GmbH can therefore neither “profit” from the losses of the associated company via an allocation of losses, nor is a “shell purchase” possible with the fiscally undesired aim of assuming losses to reduce its own trade tax burden. In the opinion of the Düsseldorf Fiscal Court, the mere participation in a co-entrepreneurship cannot therefore result in a loss forfeiture for trade tax purposes.
This decision is not yet legally binding, as the tax authorities have lodged an appeal against the fiscally unfavourable decision with the German Federal Fiscal Court (BFH), case no. XI R 9/24.
The claimant GmbH held an interest in a limited partnership (KG) from 2011 until December 31, 2020. In 2021, the sole shareholder sold his shares in the GmbH to a third party. This undisputedly constituted a harmful acquisition of shares pursuant to section 8c CIT, which, according to the legal situation, would also have resulted in the forfeiture of the trade tax loss determined as of December 31, 2020. The tax office rejected the application submitted by the GmbH for a continuation-linked loss carry forward in accordance with section 8d CIT, as it had been involved in the KG - i.e., a co-entrepreneurship - for the last three years before the transfer of shares. However, the tax court confirmed the GmbH's argument that the exemption of the participation in a co-entrepreneurship regarding trade tax has an overriding effect that was not intended by the legislator.
This is because, according to the specific trade tax rules, the provisions of the CIT on the forfeiture of the tax loss carry forward are only to be applied “accordingly” and therefore must consider trade tax specifics. There is no risk of abuse in terms of trade tax due to the participation in a limited partnership, as the limited partnership as itself is the subject and debtor of trade tax. The company involved as a co-entrepreneur can therefore deduct the losses attributable to it by the KG. However, these are added back to the trade income when the trade tax is assessed. The GmbH can therefore neither “profit” from the losses of the associated company via an allocation of losses, nor is a “shell purchase” possible with the fiscally undesired aim of assuming losses to reduce its own trade tax burden. In the opinion of the Düsseldorf Fiscal Court, the mere participation in a co-entrepreneurship cannot therefore result in a loss forfeiture for trade tax purposes.
This decision is not yet legally binding, as the tax authorities have lodged an appeal against the fiscally unfavourable decision with the German Federal Fiscal Court (BFH), case no. XI R 9/24.
Notice:
Unfortunately, the option to carry forward trade tax losses in accordance with section 8d CIT plays a rather minor role in practice due to the extensive restrictions. However, in individual cases of application, the decision discussed is likely to have a considerable impact, particularly regarding the necessary consideration of trade tax specifics, if at least the trade tax loss carry forwards can still be “saved”. The appeal proceedings should therefore be kept in mind.
Unfortunately, the option to carry forward trade tax losses in accordance with section 8d CIT plays a rather minor role in practice due to the extensive restrictions. However, in individual cases of application, the decision discussed is likely to have a considerable impact, particularly regarding the necessary consideration of trade tax specifics, if at least the trade tax loss carry forwards can still be “saved”. The appeal proceedings should therefore be kept in mind.