RESTRUCTURING CLAUSE – ECJ DECLARES AID DECISION NULL AND VOID
A change of shareholder can lead to a proportional or complete elimination of the existing losses of a company. However, this shall not apply if the acquisition of the investment is made with the aim of restructuring the company. Up to now, however, the EU Commission has regarded this so-called restructuring clause as state aid. The European Court of Justice [ECJ] has recently declared this state aid decision null and void. Therefore, the restructuring clause can be applied again.
I. Tax treatment of restructuring profits
German tax law contains specific restrictions on the deduction of losses in order to avoid misuse of the tax system. Among other things, these are intended to prevent a loss-making company with high losses carried forward from being acquired solely with the intention of offsetting the transferred losses against the profits of the acquirer. The so-called shell company purchase regulation introduced for this purpose (section 8 para. 4 German Corporation Tax Act [Körperschaftsteuergesetz – KStG] old version) was replaced by section 8c KStG as part of the 2008 corporate tax reform. Since then, this provision has provided for a proportional or complete forfeiture of losses in the case of share transfers, depending on the extent of the change in shareholding (so-called “harmful acquisition of shares“).
However, the fact that such loss deduction restrictions can also have a crisis aggravating effect and make it considerably more difficult to restructure companies became particularly clear during the 2008 financial and economic crisis.
Subsequently, the so-called restructuring clause (section 8c para. 1a KStG) was introduced on the basis of the restructuring privilege under insolvency law (section 39 para. 4 sentence 2 German Insolvency Code [Insolvenzordnung – InsO]).
1. Principle of the restructuring clause
The restructuring clause pursuant to section 8c para. 1a KStG stipulates that in the event of a harmful acquisition of shares, there will be no (proportional) forfeiture of losses if this occurs with the intention of restructuring and continuing the business of the company. Exceptions to this are cases in which business operations were largely already discontinued at the time of acquisition. A change of the industrial sector within a 5-year period also leads to the non-applicability of the restructuring clause (§ 8c para. 1a sentence 4 KStG).
Derogations such as the restructuring clause only apply to selected companies because of their limited scope. In such a case, European state aid law is intended to ensure that there is no discriminatory unequal tax treatment. In the case of the restructuring clause, the EU Commission already initiated an investigation under state aid law when the regulation was introduced in August 2009; the formal investigation under state aid law was then initiated in spring 2010.
2. State aid assessment of the restructuring clause
The prohibition of state aid is based on the principle that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market” (article 107 para. 1 of the Treaty on the Functioning of the European Union, “TFEU”).
For the specific EU state aid control of tax regulations or measures, independent requirements have been developed through case law. In particular, the criteria of advantage (“preferential treatmentcertain undertakings or the production of certain goods”) are of decisive importance. It is essential to determine whether the tax rule leads to discriminatory unequal treatment.
If these conditions are met and a tax measure is subsequently classified as state aid, the tax consequences are likely to be significant. An EU Member State will be required to recover the aid from the beneficiary. In practice, it is particularly problematic that a (possibly retroactive) tax burden is also imminent in the case of final tax assessments and the provision of binding information. There is no protection of confidence in the case of inadmissible state aid.
In the case of the restructuring clause, the EU Commission came to the conclusion at the beginning of 2011 that it constituted a selective advantage. According to the EU Commission, this cannot be justified by the approved justification either. As a result, the restructuring clause was classified as state aid and thus incompatible with the single European market.
This classification of the EU Commission was strongly criticised in the literature and partly also by German courts (cf. decision of the Working Committee of the Surveying Authorities of the States of the Federal Republic of Germany [AdV] of the Münster Finance Court of 1 August 2011 – 9 V 357/11 K). Germany was subsequently forced to reclaim the benefits granted from the companies concerned. Binding disclosures that had already been made were revoked and corresponding tax assessments were issued only in case of tax assessment subject to review (§ 164 German Tax Code [Abgabenordnung – AO]).
Some companies which fulfilled the conditions of the restructuring clause filed an action for annulment with the General Court of the European Union (“EGC”). However, at this point it should only be mentioned briefly that the Federal Government of Germany at the time also filed such an action, but one day too late. That’s why the action was dismissed as inadmissible. As a result, Germany joined the actions which had been validly brought as an intervener.
At the beginning of 2016, the EGC confirmed the opinion of the EU Commission with two largely identical rulings, which led the companies concerned to appeal to the European Court of Justice (“ECJ”). On 28 June 2018, the ECJ delivered four (again largely identical) judgments (ECJ cases C-203/16 P, C-208/16 P, C-219/16 P and C-209/16 P). The ECJ has declared the state aid decision of the EU Commission null and void.However, it should be noted that the ECJ only had to decide on the legality of the EU Commission’s negative decision. The ECJ did not have to decide on the existence of the criterion of selectivity and thus on the nature of the state aid. This gave rise to consequential questions regarding the application of the restructuring clause.
II. Consequences for practice
The decisions of the ECJ are highly appreciated by both the legislator and the taxpayer, as the restructuring clause is (again) to be applied in all cases which are still correctable. It is not clear whether the application is possible owing to the originally introduced transitional provision of section 8c KStG. The transitional provision (section 34 para. 6 sentence 2 no. 1 KStG) in its current version provides for a revival of the restructuring clause under two conditions. Firstly, the European Commission’s decision must be declared null and void by the ECJ. This is undoubtedly the case.
As already mentioned, however, the ECJ only had to decide on the legality of the EU Commission’s negative decision. It is therefore questionable whether the European Court of Justice has also made findings about the state aid character within the meaning of Art. 107 para. 1 TFEU. This is important because otherwise the EU Commission could again classify the restructuring clause as state aid. In view of the annulment and the clear argumentation of the ECJ, however, it is likely to be difficult for the EU Commission to maintain its assessment of selectivity under state aid law.
This makes it all the more important for structuring practice and M&A practice that the legislator is currently seeking clarification. The Annual Tax Act 2018 (cf. decision of the Federal Government of 1 August 2018) provides, among other things, for the implementation of the ECJ rulings on the restructuring clause. An amended transitional provision (section 34 para. 6 sentences 2 and 3 of the draft Income Tax Act) is intended to ensure the application of the restructuring clause. Retroactive application is provided for acquisition of shares which took place after 31 December 2007, provided that the corresponding tax assessments are not yet final.
Finally, it should also be noted that Section 3a of the German Income Tax Act [Einkommensteuergesetz – EStG] (Tax Exemption of Restructuring Income), which is currently a further tax rule relating to restructuring cases, is subject to a review under state aid law. In the interests of legal certainty, it is to be expected that the above-mentioned ECJ rulings on the restructuring clause will have a positive effect on this notification procedure and that a resolution will
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