On 2 September the German Finance Ministry issued a draft law introducing a provision allowing more corporations to use tax losses following a change of shareholders.
Current article 8c of the corporate income tax act (KStG) provides that a corporation’s current or carried forward tax losses are totally or partially forfeited in case of a direct or indirect ownership change. Exemptions apply for transactions in 100% controlled groups and to the extent that taxable built-in gains in assets exist at the level of the loss entity.
Since its introduction in 2008, this restriction has received repeated criticism, not only from corporations, but particularly the start-up sector. Young entrepreneurs argue that investors are less likely to finance their undertakings if losses have accumulated, especially during the founding phase, to fund research and development expenses that cannot be used later on. This is seen as a possible deterrent for the venture capital industry in Germany.
The current article 8c corporate income tax act also affects economically reasonable capital increases and cases of corporate restructurings.
The draft bill addresses these issues and proposes new article 8d. The law would allow corporations to use losses upon a change in shareholders if the business has been operating exclusively with the same business purpose for the last three years before the change in ownership or since its foundation, if this was less than three years before.
All losses carried forward or remaining would nonetheless be forfeited after the change of ownership if any of the following occurs:
- termination of business activities
- business lease arrangements
- change of business purpose
- taking up another or new business activity
- investing in a trading partnership
- becoming parent in a tax group
- contributions of assets into the loss company at less than fair market value.
The provision is only available for taxpayers upon application and verification by the tax authorities that the conditions have been met for the last three years. The new rule would apply to all shareholder changes as of 1 January.
The German Finance Ministry invited associations to comment on the draft by 8 September. The draft is expected to pass the German cabinet on 14 September. It will then be debated in parliament and the federal assembly with an aim to pass the bill by end of the year. It remains to be seen if the changes will be approved, especially by the federal assembly.
As recipients of part of the corporate income tax revenue, the federal states (Bundesländer) and municipalities would consequently collect less. In the draft law the Finance Ministry estimates that the introduction of article 8d corporate income tax act would lead to approximately 600 million Euros less corporate tax revenue annually.
This proposal should be seen in light of further and parallel developments in Germany that have led finance minister Schäuble during this week’s parliamentary budget debate to also propose cutting payroll and income taxes for low and medium earners for 2017 and 2018.
After several years of record high tax revenues and budget surpluses, the German Federal Statistics Office announced mid-August that Germany had achieved a surplus of 18.5 billion euros (USD 20.8 billion), or 1.2 percent of gross domestic product (GDP).
Germany’s debt level is also consistently decreasing. Nonetheless, tax rates have remained level or, in several cases on the municipal level, have increased. Although this could be reason enough, it is however probably the looming election in summer 2017 that has led to these proposals.
Schäuble’s political party has also proposed further tax cuts after the election. Tax cuts for corporations nonetheless seem unlikely due to the ongoing heated discussions on base erosion profit shifting (BEPS) and the public perception that corporations are not paying enough taxes.
German and foreign companies should thus instead expect increased administrative and compliance burdens, with the first anti-BEPS law implementing the EU Anti Tax Avoidance directive to be passed in Germany by end of the year.
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Ninja-Antonia Reggelin
Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.
She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.
Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.
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