Loss carryback in the case of harmful acquisition of shares during the year

In the event of a harmful acquisition of shares within the meaning of Section 8c (1) sentence 1 of the German Corporation Tax Act (KStG) during the year, any losses not utilized until the transfer date are no longer deductible in full if, within five years, more than 50 % of the subscribed capital, membership rights, participation rights, or voting rights of a corporation are transferred directly or indirectly to an acquirer or persons closely related to the acquirer or a comparable situation arises.

According to the German tax authorities (BMF circular dated November 28, 2017, BStBl. I 2017, 1645, paras. 2, 31, 33), this also includes losses resulting from the provisions on loss carry-forward and carry-back (Section 10d of the German Income Tax Act (EStG)). Losses which arose up to the date of the harmful acquisition of shares may therefore neither be offset against or deducted from profits arising thereafter, nor carried back to previous assessment periods. The German Federal Fiscal Court (BFH) takes a position on the case of loss carrybacks in its decision dated July 16, 2025 (case no I R 1/23).

In the case in dispute, E-GmbH (= limited liability company) was merged with another limited liability company (GmbH) retroactively to October 1, 2018, by contract dated October 31, 2018. The latter had acquired all shares of E-GmbH on October 17, 2018. E-GmbH had a taxable income of around EUR 1.8 million in 2017. In the 2018 financial year (January 1 to September 30, 2018), it generated a loss of approximately EUR 14,000. The tax office rejected the requested loss carryback to 2017. It reported the loss as “a loss for the current assessment period that cannot be taken into account under Section 8c KStG” with the explanation that “due to the transfer of 100 % of the shares, the full loss reduction under Section 8c (1) sentence 1 KStG applies.” The tax court and BFH disagreed.

This is because Section 8c (1) sentence 1 KStG does not prohibit the losses generated in the financial year of the harmful share acquisition from being carried back to the financial year prior to the share transfer. Only losses generated in the past should be disregarded in the following period if they are attributable to the new economic involvement of the new group of shareholders. However, if the economic identity and the generation of the loss coincide, which is particularly the case when a loss carryback is claimed, there is no reason to restrict the loss deduction.

The pending decision of the German Federal Constitutional Court (BVerfG) (case no. 2 BvL 19/17) on whether the current wording of Section 8c KStG is constitutional was not relevant to the decision in the case in question.

Notices:

In its decision of November 30, 2011 (case no. I R 14/11), BFH had already clarified that profits generated up to the date of the harmful acquisition of shares can be offset against losses that have not yet been utilized. The tax authorities have concurred with this (BMF circular of November 28, 2017, BStBl. I 2017, 1645, para. 34). The current BFH decision therefore logically continues with the principle established there that losses generated under the old control and the old economic identity of the company are to be excluded from the loss elimination and are likely to be welcomed in practice, even if the reaction of the tax authorities remains to be seen.

With regard to a harmful acquisition of shares in cases involving fiscal unity, the Düsseldorf Fiscal Court ruled in its decision of December 9, 2024 (case no. 6 K 1772/20; appeal BFH I R 11/25; BDO Insight) that in the case of an acquisition of a shareholding during the year through the transfer of shares in the controlling company, a proportionate loss of the controlled company up to the date of the harmful acquisition of the shareholding must be deducted from the total income of the controlling company. This also corresponds to the principles currently confirmed by BFH.