Germany: 149. Application of 1990 Loss Utilisation Restrictions to Pre-1990 Losses

Last Updated: 7 November 1998
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In a recent decision (DStR 1998, 1087 - 11 February 1998), the Federal Tax Court has confirmed the tax authorities' interpretation as to the effective date of the 1990 loss carryforward restrictions, holding that the assessment period (calendar year) in which losses accrued is irrelevant to the operation of the new restrictions, which apply generally to assessment periods from 1990 on (and to assessment periods as early as 1988 if the transaction leading to the loss of economic identity was entered into after 23 June 1988).

In the case decided, the transaction leading to the loss of economic identity under the 1990 version of the statute (more than 75 % change in ownership) took place in 1987, hence the new restrictions applied starting with the 1990 assessment year. The taxpayer corporation sought to deduct loss carried forward from 1983 on its 1990 return. The deduction was denied on the grounds that the new restrictions applied irrespective of the year in which the loss in question arose. The Federal Tax Court upheld the lower court and the tax authorities in refusing the deduction, rejecting in particular the taxpayer's objections that application of the statute to losses which accrued prior to its effective date would violate the constitutional prohibition on retroactive tax legislation.

In addressing the constitutional issues, the court distinguished between "genuine" retroactive effect, which is unconstitutional, and mere "retrospectivity", which is permissible. Genuine retroactive effect required, in the court's view, that a law change the treatment of a transaction as to which all elements legally relevant for determining a particular treatment were completed in the past. This was not the case with regard to losses which accrued in years prior to the effective date of sec. 8 (4) KStG because the deduction of these losses was an essential element of their legal treatment and this deduction did not occur in the past.

The court also addressed the question whether the taxpayer was entitled to protection for his reliance on the continued validity of the law in force at the time of the 1987 restructuring decision which led to the loss of economic identity (under the 1990 statute). The court held that it was necessary to weigh the respective interests of the taxpayer and the government. It came to the conclusion that the taxpayer had reason to expect that the government might change the law in this area and that therefore the taxpayer was not to be protected in his reliance its continued validity.

The court does not mention an important part of the historical background of sec. 8 (4) KStG. Up until the decision of the Federal Tax Court of 29 September 1986 (BStBl II 1987, 308), court-created loss utilisation restrictions close to those legislated in the 1990 version of sec. 8 (4) KStG were applied by the tax authorities. In the cited decision, the First Chamber (I. Senat) of the Federal Tax Court indicated that it would abandon the line of cases on which the court-created restrictions were based and in the future permit loss carryforwards to be used as long as the corporation claiming the deduction was legally identical to that which sustained the loss. This in turn prompted the legislature to enact sec. 8 (4) KStG.

In the present case, the court is saying in effect that the taxpayer had no reason to rely on the acquiescence of the legislature in the September 1986 decision of the Federal Tax Court.

A case apparently posing similar issues has been decided by the Duesseldorf tax court (EFG 1998, 1359 - 21 April 1998). The lower court's decision parallels that of the Federal Tax Court in the case here reported on. An appeal to the Federal Tax Court is pending, however.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

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