Germany: New Dual Consolidated Loss Rules in Germany

Last Updated: 28 January 2003
Article by Dieter Endres

By Dieter Endres and Angelika Thies, PricewaterhouseCoopers, Frankfurt/Germany

Prof. Dr. Dieter Endres is the head of the tax and legal services practice in Germany, Dr. Angelika Thies is an international tax partner in Frankfurt

As usual in the closing weeks of the year the German legislators have again come up with an omnibus tax bill. The Corporate Tax Development Act adds a, by German legal standards, short sentence to the Organschaft provisions of the Corporation Tax Act stating that, "A loss of an Organschaft parent is not to be taken into account for domestic taxation insofar as it is taken into account in a foreign state when levying a tax comparable to the German taxation on the Organschaft parent." The government's official explanation of this proposed change to the law attached to the bill laid before parliament says, almost equally succinctly, that, "The additional new sentence is to prevent losses of dual resident companies from being offset twice over, at home and abroad, or the offset always being to the detriment of the Federal Republic of Germany as a result of the national rules of foreign countries (e.g. in the USA)."

This new provision and its official explanation seem, at first sight, logical, reasonable and, above all, relatively innocuous for most multinational companies or other cases of cross-border investment to or from Germany. Closer examination reveals, however, that none of this is so. The explanation does not explain the bill as drafted, the wording of the statute is vague, and there seems to be no consensus at any level of society as to which abuses are to be curbed and why. Almost certainly, the provision will require repair very soon, be it by changing the statute, or be it by issuing a long, explanatory implementation decree purporting to explain the statutory provision with examples, but, in fact, changing it into something at least workable.

The immediate prompt for the change was an amendment to the Organschaft definition changing the demand that an Organschaft parent have both its seat and place of management within Germany to one requiring only one of the two criteria. Thus, a German Organschaft parent can now, for the first time, be resident in two countries.

The German provision is modelled on the US dual consolidated loss rules of Sec. 1503 (d) of the Internal Revenue Code (IRC). Sec. 1503 (d) is designed to prevent double dipping of losses, although it only became workable once extensive regulations on its application were promulgated some six years after it attained statutory force. These US regulations cover matters such as how losses are to be calculated when accounting rules differ between the two countries, recapture provisions in the face of future profits, application of the rules to permanent establishments and to comparable vehicles such as partnerships and check-the-box entities, interaction with other US legislation and intermeshing with mirror legislation abroad. There is no indication that the German counterpart to this legislation will prove any simpler in practice. Unfortunately, there is also no reason to believe that those responsible for the German statute have even thought about the implications beyond those on the (unrevealed) specific abuse they had in mind. To cap all, the new provision entered into force on December 25, 2001 with application to the 2001 year of assessment. Effectively, application is therefore retroactive for almost the entire year - or, indeed, for a full business year already over for most companies with non-calendar year ends - and this is bound to raise questions as to its conformity with the constitutional prohibition on retroactive taxation. For some, the position is exacerbated by the consideration that the original Bill carried a different wording of different import when laid before Parliament, so that the ministry civil servants cannot claim realistically that taxpayers could (should?) have known of the coming changes in time to react (abroad?).

There are many other open questions which must be answered, if the new rule is to be accepted by the taxpaying public as fair, reasonable and in accordance with the constitution. Perhaps the most important of these is the fundamental question as to why the provision applies to Organschaft parents only and not to other companies. After all, any German company can have a second residence in any country basing tax residence on the place of management as a, or the, sole criterion. The answer to this question may well reveal a breach of the constitutional requirement of equality of taxation varying only according to the ability to pay.

From the functional point of view, the question must be asked as to whether dual residence is really the target at all. The official explanation to the Bill says that it is, but the statute itself does not mention dual residence as a concept one way or the other. The USA allows a German subsidiary, which can easily be an Organschaft parent, to opt for the status of a disregarded entity under the check-the-box rules, which would mean that its German results, profits or losses, would automatically flow into the tax return of its US parent. Within Europe, at least France and Denmark allow tax groups to include foreign subsidiaries under certain circumstances. In all three cases, the absence of any form of recapture provision in the German statute will lead to serious questions of double taxation. If, for example, the German Organschaft parent's loss is taken into account in France by its own French shareholder under the bénéfice consolidé rules, that loss will not be deductible in Germany against future profits under the new provision. Once the future profits are earned they will be taxable in Germany and in France without relief for the previous loss (though, in France, this will already have been offset against other income). The German tax now payable will be credited against the French tax, although it is hard to see why the French government should be prepared to give a credit for German tax that has only been paid because of Germany's refusal to allow offset of a German loss, and it seems equally unrealistic to expect the French shareholder to accept the resulting double taxation without seeking relief through the courts or under the EU Arbitration Directive. A request for arbitration proceedings under that Directive could, of course, quite easily lead to the German statute being held to be an illegitimate barrier against freedom of movement within the EU.

Seen at a more local level, questions remain as to what exactly is meant by some of the terms used in the statute. This starts with the reference to the loss of the Organschaft parent. Common sense suggests that the entire net loss of the Organschaft - after all profit surrenders and loss subventions from or to the subsidiaries have been taken into account - must be meant, although the wording of the Act is not necessarily so clear.

The reference to a "comparable tax" abroad might be taken to mean that the Organschaft parent must be taxable abroad in its own name, or it might also include those cases where the results of the German company are included in the taxable income of another company abroad, whether as the consequence of a US check-the-box election, or of membership of a French or Danish tax group.

In the same vein, it is not entirely clear what is meant by "taking a loss into account". Is the actual offset abroad against non-German income meant, or will the German right to carry forward the loss be forfeit as soon as the loss is carried forward abroad for later offset against as yet unearned future profits?

As a final remark, it would seem fair to suggest that the amending statute was drafted under the assumption that the German Organschaft parent must necessarily be a corporation with its own legal identity and tax personality. If so, the assumption was false. A German Organschaft parent, though not the subsidiary, can be any business entity operating in Germany, that is in particular, it can easily be a partnership or the German branch of a foreign company or other business. If a partnership is involved, it is, by German definition, the partners and not the partnership that are subject to tax. If these are foreign corporations (or individuals), it would seem impossible to deny them the right to carry forward their German losses in Germany without regard as to what happens in their home countries, without reaching the non-discrimination clauses of the relevant double tax treaty.

In the view of the authors, the German tax legislator has not only failed to hit the target, he has not even clearly said what he is aiming at. There is no doubt of the need for clarification, whether as a further amendment to the statute or as an interpretative decree.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions