The Supreme Tax Court has allowed a GmbH to retain its loss carry forwards after the complete change of ownership of its parent despite subsequent injection of fresh capital.

The anti-abuse rules of the Corporation Tax Act designed to prevent the sale of tax losses make the offset of prior losses conditional on the company having kept its "business identity" throughout the intervening period. "Business identity" is stated in the statute as being broken, "in particular" where "more than half the shares in a corporation are transferred and the corporation continues or resumes its business with substantially new assets".

The case before the Court concerned a four tier structure. An operating company was separated from its ultimate subsidiary, active in the same line of business, by two otherwise inactive holding companies. Each shareholding was 100%. The top company sold its immediate subsidiary, the first holding company. That first holding company retained its shareholding in the second holding company, as did that latter in the operating entity. The operating GmbH had large accumulated losses and had effectively ceased to actively canvass new business before the shares in its parent were sold. Subsequent to the sale, the new ultimate owner arranged for an injection of substantially new capital, enabling a restart to business operations and making ultimate loss utilisation appear a realistic prospect. The tax office denied the GmbH the right to carry its losses forward on the grounds that the two conditions for breaking its "business identity" had both been met.

The Court sided with the taxpayer, with the GmbH. It pointed out that the statute did not define "business identity" exhaustively, but merely by example - "in particular". The Court held that any other example would have to be "commercially similar" to that given in the statute for it to have the same effect. This was not the case here, as the statute only covered transfers of shares by their immediate owners. Any extension of this principle "up the chain" would require statutory authority or at least an indication in the statute, but here there is neither.

It will be interesting to see the reaction of the Ministry of Finance to this case. If they decide to accept it as a precedent, many fears for German NOLs following corporate mergers or reorganisations on the international level will be allayed. If they choose not to accept it and instruct tax offices not to apply it except to the case actually decided, tax offices and taxpayers alike will face several more years of uncertainty. The case, ref. I R 61/01, of August 20, 2003 was published by the Supreme Tax Court on its website,, on October 29. Its German text can be freely downloaded.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.