The German tax legislator intends to make it easier for corporations to utilise income tax loss carryforwards. Under the current legal situation, the utilisation of such loss carryforwards for tax purposes is jeopardised by changes in the shareholder structure: If more than 25% of the shares are transferred to a purchaser within five years, the corporation's income tax loss carryforwards can no longer be utilised on a pro rata basis; they expire completely if more than 50% of the shares are transferred (Section 8c KStG). To date, there have only been two exceptions to this, namely the "group clause" for certain intragroup restructurings and the so-called "hidden reserves clause", which maintains the utilisation of loss carryforwards in the amount of the hidden reserves existing in the assets of the corporation.
On the basis of a proposal submitted in September Draft law In order to further develop tax loss offsetting for corporations, a further exception is to be introduced, according to which losses can continue to be utilised upon application, regardless of an actually harmful change of shareholder, if the company continues its previous business operations and certain other conditions are met (so-called continuation-linked loss carryforward, Section 8d KStG-E). In this context, the discontinuation of the loss-generating business operation, a change of sector or the commencement of a further business operation, for example, are detrimental. The term "business operation" is to be defined according to qualitative characteristics (services or products offered, the customer and supplier base, the markets served and the qualifications of the employees) as part of an overall assessment. In particular, this is intended to reduce tax obstacles for new shareholders in companies that do not yet have significant hidden reserves (e.g. in the start-up sector).
The simplification is to come into force with effect from 1 January 2016 and apply to all changes of ownership after 31 December 2015. The further legislative process remains to be seen; in particular, the Bundesrat still has to approve the draft bill.
Dr Thomas Elser is a tax consultant at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.
