I. General information on the forfeiture of tax losses pursuant to section 8c KStG

Preserving loss deductions for corporations in connection with a transfer of shares or similar measures has been a key issue in Corporate Tax Law for years. The trigger is a legislative concern of an infringing “trafficking of losses” in such a way that a purchaser of a corporation utilizes any existing losses carried forward for himself (a so-called shell company acquisition), even though that corporation does not have any business operations or significant business assets. Therefore, the legislator had normatively set the prerequisites for loss exploitation. The first legal anchoring took place in 1990 in section 8 para. 4 KStG old version which – after some modification had been made – was replaced by the follow-up regulation of section 8c KStG within the framework of the 2008 Corporate Tax Reform Act. The legislator had designed the provisions under section 8c KStG as an allegedly “simpler and more targeted limitation of loss deductions” which henceforth focused solely on the change in shareholder as decisive criterion for the intervention of limitation of loss deduction. The prerequisite which was considered in the preceding standard of the injection of mostly new business assets was waived. As a result, section 8c KStG was defused by so-called alleviation regulations and had repeatedly been subject of financial, constitutional and European judicial proceedings.
Compared to its previous version (i.e. prior to the adoption of the latest amendments by the UStAVermG; see paragraph II.2 below for more details), section 8c KStG old version contained two alternative legal requirements with different legal consequences each:
Section 8c para. 1 sentence 1 KStG old version regulates the proportionate forfeiture of tax losses if more than 25 % (up to 50 %) of the subscribed capital, the membership rights, the participation right or the voting rights (simplified: shares) in a corporation were transferred directly or indirectly to a purchaser or a person related to the purchaser or if there is a comparable situation. Section 8c para.1 sentence 2 KStG old version standardized a complete forfeiture of tax losses if – under the prerequisites mentioned – more than 50 % of the shares were transferred or if there was a comparable situation
A (proportionate) forfeiture of losses could only be avoided by the strict requirements of the so-called group clause [Konzernklausel] (section 8c para. 1 sentence 5 KStG old version), the hidden-reserve-clause [Stille-Reserven-Klausel] (section 8c para.1 sentence 6 to 9 KStG old version), the restructuring clause [Sanierungsklausel] (section 8c para. 1a KStG old version) or the continuing losses carried forward (section 8d KStG). If these prerequisites were met, it did not lead to a proportionate or complete forfeiture of losses – the losses were rather proportionately spared or were maintained in full.

II. Proportionate forfeiture of tax losses pursuant to section 8c para. 1 sentence 1 KStG old version

The provisions under constitutional law planted the alleged glimmer of hope for a preservation of losses carried forward despite harmful acquisitions of shares. Since its normative anchoring, section 8c KStG had been highly controversial from a constitutional point of view. That was mainly, because the mere connection to a change of shareholders was considered as an unjustified unequal treatment. The Hamburg Finance Court had, therefore, presented the regulations on the proportionate forfeiture of tax losses pursuant to section 8c para. 1 sentence 1 KStG old version to the BVerG by an order for reference dated 4 April 2011 for constitutional examination.

1. Decision of the BVerG of 29 March 2017

By resolution of 29 March 2017 the BVerfG (file no.: 2 BvL 6/11) decided on the question of constitutionality of section 8c para. 1 sentence 1 KStG old version (i.e. concerning a proportionate forfeiture of tax losses) that these regulations were unconstitutional in the period from 1 January 2008 to 31 December 2015. (For the time periods from the introduction of section 8d KStG with effect as of 1 January 2016, the BVerfG had, however, expressly left open the issue of constitutionality of section 8c para. 1 sentence 1 KStG old version.)
According to the BVerfG, section 8c para. 1 sentence 1 KStG old version would cause a different treatment of corporation regarding the regulation of their taxable income, depending on the existence of a harmful acquisition of shares. The unequal treatment was not justified – an objective reason was missing. Even though an unequal treatment could in general be justifiable, because it would aim at combating abusive tax structuring. With the introduction of the regulation on abusive prevention, however, the legislator had to comply with e.g. the limitations of an admissible typification. In the present case, an acquisition of a participation of more than 25 % in a corporation would not indicate an abusive structuring, so that section 8c para. 1 sentence 1 KStG old version is incompatible with article 3 para. 1 German Constitution. In addition, the regulation does not focus on the change of economic identity intended by the legislator. Other objective reasons for justification, such as the corporate identity, could, however, not justify the unequal treatment. In addition, the restructuring clause, the group clause and the hidden reserve clause do not change anything about the unequal treatment.
The legislator was therefore instructed to replace the old regulation by 31 December 2018 which would eliminate the constitutional violation retroactively to 1 January 2008. Should the legislator fail to comply with this obligation, section 8c para. 1 sentence 1 KStG old version would become null and void with retroactive effect from 1 January 2019.

2. Implementation of the decision of the BVerfG by the UStAVermG

The legislator fulfilled this judicial order with the UStAVermG of 11 December 2018. In the draft discussion of the Federal Ministry of Finance [BMF] on the UStAVermG, initially only a “minimally invasive” legislative adaptation of the KStG was intended. The temporal scope of section 8c para. 1 sentence 1 KStG old version should therefore only be suspended for harmful acquisitions of shareholdings that took place after 31 December 2007 and before 1 January 2016. On the basis of the recommendations of the committees (under the lead of the Finance Committee), it was decided to suspend section 8c para. 1 sentence 1 KStG old version also for the years 2016 to 2018 and for the future. As a result, section 8c para. 1 sentence 1 KStG old version was revoked with retroactive effect from 1 January 2008 without replacement. The provision is now no longer contained in section 8c KStG new version, so that the previous provisions have each moved one sentence forward.

III. Complete forfeiture of tax losses pursuant to section 8c para. 1 sentence 2 KStG old version

In view of the regulations under section 8c para. 1 sentence 2 KStG old version (now section 8c para. 1 sentence 1 KStG new version) concerning the change of shareholders by more than 50 % and the resulting complete forfeiture of the loss carried forward, the legislator of the UStAVermG does not (yet) share the constitutional doubts prevailing in the literature and the case-law of the finance courts.
According to the order for reference of the Hamburg Finance Court of 29 August 2017, there are also serious doubts regarding the constitutionality of section 8c para. 1 sentence 2 KStG old version. In the opinion of the Finance Court, the application of section 8c para. 1 sentence 2 KStG old version with regard to cross-period loss offsetting leads to different treatment of corporations with and without a change in shareholders. In the Court’s view, there is no objective justification for this unequal treatment. Section 8c para. 1 sentence 2 KStG old version does serve to combat abuses. However, the sole connection to share transfers does not mean that the characteristic case of abuse is chosen as a model, so that the limits of permissible typification are exceeded. Furthermore, it is questionable whether the ”guillotine” effect of the case anchored in section 8c para. 1 sentence 2 KStG old version, since the loss carried forward is completely lost in the event of a change of shareholder of 50.01%, is consistent.
For the BVerfG, it could be in the decision as to whether section 8c para. 1 sentence 2 KStG old version is unconstitutional material whether (in contrast to the decision in section 8c para. 1 sentence 1 KStG old version) the possibility of the majority shareholder exerting influence can change the economic identity of the company, so that any unequal treatment based on this would be justified. In the literature, however, it is doubted – with a view to the remarks of the Court on section 8c para. 1 sentence 1 KStG old version – that this is the case, since in this respect the actual influence is decisive, but not the mere possibility of having an influence.

IV. Conclusion

The decision of the BVerfG on the constitutional conformity of the proportional forfeiture of losses and the subsequent removal without replacement of the provision on the proportional forfeiture of losses represent the first step towards greater planning and legal certainty. The decision from Karlsruhe on the constitutionality of section 8c para. 1 sentence 2 KStG old version on the unconstitutionality of the complete forfeiture of tax losses in accordance with section 8c para. 1 sentence 2 KStG old version remains eagerly awaited. In this case, it is the task of the legislator to improve the situation – preferably by means of a revised regulation on the forfeiture of tax losses, which replaces the previously complicated concept of rules and exception constellations with rules on the forfeiture and protection of tax losses.