Based on an agreement between the parties of the German government, the Ministry of Finance (BMF) appointed a working group between officials from the federal and the state tax administration to examine the possibility of amending the tax loss carryforward rules and the group taxation rules. Somewhat disappointingly, the working group concluded in its report delivered on 10 November 2011 that most changes that are desirable from an economic or systematic perspective would be too expensive to implement.
The working group looked at various possibilities for changing the minimum taxation rules (according to which only 60 % of income exceeding EUR 1 million can be offset with loss carryforwards), such as abolishing the rules altogether, phasing out the rules or introducing exceptions to minimum taxation in certain situations (e.g. restructurings) where loss carryforwards are forfeited. Given the losses of tax revenue that would result from each of the proposals, the working group recommended that the rules remain unchanged. The group reached the same conclusion with respect to the change-in-ownership rules, which were eased by the introduction of the intra-group exception and the built-in gains exception at the end of 2009. According to the working group, no further relaxations should be introduced (such as the ability to transfer losses in an intra-group merger).
In a cross-border context, the working group recommended that a legal definition of “final losses” of foreign permanent establishments be introduced. According to jurisprudence of the European Court of Justice (ECJ), final losses of foreign permanent establishments have to be taken into account when calculating the domestic tax basis of a company. However, the group’s proposal is not intended to facilitate the use of foreign losses by German taxpayers. On the contrary, the aim would be to narrow the definition of final losses to override previous jurisprudence of the German Federal Tax Court that tended towards a rather broad interpretation of the concept.
When the current German government was formed in 2009, a review of the existing group taxation rules was put on the political agenda (see Deloitte Tax-News). Following this general announcement, discussions were inspired by various models proposed by interest groups and seemingly well received by the tax authorities. However, again citing a potential loss of revenue, the working group recommended the retention of the Organschaft rules, which require a profit and loss transfer agreement in order to benefit from consolidated tax treatment. If the government is willing to accept a revenue shortfall of around EUR 2 billion, the working group recommended introducing a group contribution system because such a system is easier to administer.
Even though the working group’s report indicates that the tax administration does not see scope for any favorable changes to the German rules on tax losses, minimum taxation rules or the group taxation rules in the near future because of budgetary constraints, there may nevertheless be an overriding political interest to amend the German tax rules in the context of the French-German tax convergence project. This project aims at aligning the French and German corporate tax base. Since France is neither likely to adopt the German change in ownership-rules nor the “Organschaft” requirements, German “convergence” towards the French rules in these areas potentially still is a possible outcome.
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