lunes, 17 de julio de 2017

Germany: Federal Constitutional Court finds change-in-ownership rules partially unconstitutional

In a taxpayer-favorable decision issued on 29 March 2017 (published on 12 May 2017), Germany’s Federal Constitutional Court held that the change-in-ownership rules relating to loss carryforwards partially infringe the German constitution, and must be amended with retroactive effect.
Under the change-in-ownership rules, net operating loss carryforwards, interest carryforwards and current-year losses are forfeited if there is a “harmful change in ownership.” A direct or an indirect transfer of more than 25% (and up to 50%) of the shares in a company that has loss carryforwards results in a pro rata forfeiture of the tax loss carryforwards, and a transfer of more than 50% of the shares results in a complete forfeiture of all available carryforwards. There are three exceptions to the application of the loss forfeiture rules: (i) the intragroup restructuring exception; (ii) the built-in-gains exception; and (iii) the business continuation exception. The intragroup restructuring exception and the built-in-gains exception are applicable as from 2010, and the business continuation exception
applies as from 2016 .
The case before the Constitutional Court involved a direct transfer of between 25% and 50% of a company’s shares that resulted in a partial forfeiture of the taxpayer’s tax loss carryforwards. The court concluded that the rules violate the constitutional principle that companies should be taxed on their financial performance. The legislative intent to prevent loss trafficking by using “empty loss companies” may be an acceptable justification for an exception to this principle, but a partial forfeiture of loss carryforwards where there is a change in shareholders of between 25% and 50% is considered too broad and cannot be used to deem the taxpayer’s behavior to be abusive.
The Constitutional Court restricted its decision to transfers of between 25% and 50% of a company’s shares. The court did not provide an opinion on the constitutionality of the rule resulting in a full forfeiture of loss carryforwards following a transfer of more than 50% of the shares; therefore, this decision will have no impact on those transfers. However, it should be noted that a separate procedure on transfers of more than 50% is pending before the federal tax court.
The court also clarified that the introduction of the intragroup restructuring and the built-in-gains exceptions to the change-in-ownership rules do not affect its analysis. However, the introduction of the business continuation exception as from 1 January 2016 potentially could change the analysis, because this exception may allow the taxpayer to demonstrate the absence of an abusive intent for the share transfer. The court, therefore, limited the scope of its decision to the period from 1 January 2008 through 31 December 2015. (The decision did not address whether the change-in-ownership rules are in line with constitutional principles following the introduction of the business continuation exception.)
The Constitutional Court has asked the German legislature to draft and implement an amended change-in-ownership rule that is in line with constitutional principles by 31 December 2018, and that would apply retroactively for the period from 1 January 2008 until 31 December 2015. If the rules are not amended within this timeframe, the changein-ownership
rules for ownership transfers of between 25% and 50% of the shares in a company automatically will
become void on 1 January 2019 for the 2008-2015 period.
The court’s decision should apply for both corporate income tax and trade tax purposes. Tax assessment notices that became final in the 2008-2015 period, and that are not considered preliminary pending a decision of the Constitutional Court, should not be able to be amended based on the court’s decision. Only tax assessment notices that still are open may be affected.

Source: Deloitte

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