Background
With corporations, a (proportional) forfeiture of losses occurs if more than 25% and up to 50% of the shares are transferred to a new acquirer within a five-year period — the so-called "shell company rule". Its purpose was to prevent abuse, namely that GmbHs with high loss carryforwards were acquired solely to make use of those losses (§ 8c (1) KStG). In concrete terms, this rule means that losses from the previous activity of a GmbH are forfeited and are therefore no longer available for offsetting against later profits.
The Bundesverfassungsgericht (Federal Constitutional Court) has now ruled that this loss reduction may not apply on a flat-rate basis and is therefore unconstitutional.
Facts of the Case
The case submitted to the court was as follows:
The plaintiff, a GmbH, organised, planned and arranged package tours. The company was founded in 2006 by two shareholders and incurred losses in 2006 and 2007. In 2008, one of the shareholders transferred his shares to a new shareholder because the former shareholder was personally in financial difficulty. The GmbH generated profits in 2008, with the result that, in total for the years 2006 to 2008, an almost balanced result was achieved.
However, due to the change of shareholders, a large part of the losses from 2006 and 2007 was not recognised by the tax office, which resulted in a corporate income tax liability for 2008 of approximately EUR 43,000.
The Bundesverfassungsgericht ruled that this tax liability was not lawful and held the flat-rate loss reduction for GmbHs to be unconstitutional.
New Rules Must Be Adopted
According to the Bundesverfassungsgericht, the legislator must now adopt new statutory rules by 31 December 2018. If it fails to do so, the loss reduction provision will be void in its entirety from the outset.
Note for All (Affected) GmbHs
All companies in which a loss reduction was carried out due to a change of shareholders for the years between 2008 and 2015 may potentially benefit from these new rules.
It is important that the relevant tax assessment notice has not yet become final and binding. Please have this reviewed and, if necessary, file an objection against the corresponding tax assessments, or ensure (or have it ensured) that they remain "open".
It has not yet been clarified whether cases from 2016 onwards will also be affected by these new rules, as the legislator has modified the legal framework in this respect.
Frequently asked questions
Frequently asked questions
What does Section 8c (1) KStG regulate regarding shell company acquisitions?
Under Section 8c (1) KStG, loss carryforwards of corporations are forfeited on a pro-rata basis if more than 25% and up to 50% of the shares are transferred to a new acquirer within a five-year period. If more than 50% of the shares are transferred, the losses are forfeited in full. The provision was originally intended to prevent abuse through the acquisition of GmbHs solely for the purpose of utilizing tax losses.
Why did the Federal Constitutional Court rule the loss forfeiture under § 8c KStG unconstitutional?
The Federal Constitutional Court held that the flat-rate reduction of loss carryforwards upon a change of shareholders between more than 25% and up to 50% may not apply without differentiation. The provision violates the principle of equality because it also captures cases in which no abuse exists. The legislator was required to enact a new regulation by 31 December 2018; otherwise, the rule is retroactively void.
Which period is affected by the Federal Constitutional Court's decision on Section 8c KStG?
The decision concerns loss reductions resulting from a change of shareholders in the years 2008 to 2015. For periods from 2016 onwards, it has not yet been conclusively clarified whether the new rule also applies, as the legislator has modified the legal framework in the meantime.
What should affected GmbHs do to benefit from the unconstitutionality ruling?
Affected GmbHs should check whether their tax assessments for the years 2008 to 2015, in which losses were reduced due to a change in shareholders, are not yet final. An appeal should be filed against any open assessments, and existing appeals should be kept open in order to benefit from a new regulation.
What happens if the legislator does not adopt new rules on Section 8c KStG?
If the legislator fails to adopt a constitutional new provision by 31 December 2018, the loss-restriction rule under Section 8c (1) KStG will be entirely void from the outset, i.e. retroactively from 2008. Any loss reductions imposed under this rule would then be wholly ineffective.