Background: Under current legislation, a corporation's loss carryforwards are forfeited if more than 25% of its shares are transferred to a third party within a five-year period. If more than 50% of the shares are transferred, the loss carryforward is lost entirely.
The Federal Constitutional Court has held that the pro rata forfeiture of losses in the case of a minority transfer of less than 50% is unconstitutional. It has not yet ruled on whether this also applies to a transfer of more than 50% of the shares. Two proceedings on this issue are currently pending before the BFH, which is why an appeal should be filed in pending cases if the tax office intends to cancel the loss carryforwards in full. The legislator has been given until 31 December 2018 to remedy the breach and must now address the constitutional violation for the years 2008 to 2015.
As a precautionary measure, the legislator has already provided that, for years from 2016 onwards, loss carryforwards may be preserved despite a change of shareholders under certain conditions (= continuation-bound loss carryforward).
However, the following conditions must be met in order to preserve the loss carryforward:
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Unchanged continuation of the existing business operations for three years or since the company was founded
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No additional business operations may be taken up
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The corporation must not hold an interest in a co-entrepreneurship (Mitunternehmerschaft)
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The corporation must not be or become a controlling company (Organträger) in a tax group, and
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No assets may be contributed below their fair market value
If even one of these conditions is no longer met, the continuation-bound loss carryforward is forfeited immediately.
We therefore advise you to inform us of any planned changes in shareholders at an early stage, so that we can review and plan accordingly and avoid jeopardising existing loss carryforwards.
Frequently asked questions
Frequently asked questions
When do a GmbH's loss carryforwards expire upon a share sale?
Under § 8c KStG, loss carryforwards expire pro rata if more than 25% of the shares are transferred to a single acquirer within a five-year period. If more than 50% of the shares are transferred, the loss carryforward is forfeited in full. This rule also applies to interest carryforwards and other loss items.
What did the Federal Constitutional Court rule regarding the forfeiture of losses in GmbH share transfers?
The Federal Constitutional Court (BVerfG) ruled that the pro-rata forfeiture of losses upon transfer of more than 25% up to 50% of shares is unconstitutional. The legislator was required to remedy this constitutional violation for the years 2008 to 2015 by 31 December 2018. Whether the unconstitutionality also applies to transfers exceeding 50% has not yet been conclusively clarified.
Should an appeal be filed if the tax office cancels the loss carryforward in full?
Yes, in cases involving a transfer of more than 50% of the shares, an appeal should be filed against the full cancellation of the loss carryforward. The reason is that two cases are currently pending before the BFH reviewing the constitutionality of this scenario. Affected assessments should be kept open until a decision is issued.
What is the continuation-linked loss carryforward under § 8d KStG?
Since 2016, corporations may, upon application, preserve loss carryforwards despite a harmful change in shareholders if they continue their business operations unchanged. Requirements include unchanged continuation for three years or since incorporation, no addition of a further business operation, no participation in a co-entrepreneurship, no status as a controlling company in a fiscal unity, and no contribution of assets below fair market value.
What happens if a requirement for the continuation-bound loss carryforward ceases to apply?
As soon as even one of the mandatory requirements is no longer met, the continuation-bound loss carryforward is forfeited immediately and in full. Planned changes in shareholders or business operations should therefore be reviewed for tax implications at an early stage in order to avoid jeopardizing existing loss carryforwards.