In a recently published decision, the local tax court of Nuremberg expressed serious doubts as to whether the limited offset of loss carryforwards from previous fiscal years is in line with the principles of the German Constitution (case reference 1 V 1379/2009).
Under the tax loss rules, loss carryforwards may be offset against current year income up to EUR 1 million without restriction, but amounts over EUR 1 million may be offset only up to 60% of the excess over EUR 1 million (“minimum tax rule”). The change-in-ownership rule and the rules on certain types of reorganizations generally provide that loss carryforwards will be forfeited in various cases.
The case involved a taxpayer that had applied to suspend the execution of a tax assessment in which the tax authorities had invoked the minimum tax rule to limit the offset of loss carryforwards. The taxpayer argued that where a loss carryforward could not be used in subsequent years because of a forfeiture of the losses under the change-in-ownership rule or the rules on reorganizations, a previous year’s limitation of a loss offset was in conflict with the principles in the German Constitution, according to which taxpayers should be taxed on the basis of their economic abilities. The court viewed this argument as sufficient to presume that there may be serious doubts about the legality of the tax assessment, and therefore the assessment should be suspended.
It is now up to the court to decide in the main proceedings whether the taxpayer’s argument is valid in the context of the case in its entirety. If so, the court must refer the question to the Federal Constitutional Court, which has the sole authority to determine whether a rule contradicts the German Constitution.
Taxpayers whose tax losses were eliminated under the change-in-ownership rule or the rules on reorganizations should review the tax assessments of previous fiscal years. If the use of losses forfeited was restricted by the minimum tax rule, taxpayers should consider keeping the assessments open by filing an objection.
If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.
