Back to home
20.06.2014
German Tax and Legal News

Federal tax court opinion provides no guidance on treatment of remaining liabilities in liquidation

In a decision dated 5 May 2014, the federal tax court (BFH) failed to provide expected guidance on the tax treatment of the remaining liabilities of a company at the end of a liquidation process. The BFH ruled on the appeal of the lower tax court of Cologne’s decision (dated 6 March 2012) without addressing the controversial issue.

The liquidation of an over-indebted company can be a demanding process for the company and its advisors. In addition to the business implications and procedural obstacles of the liquidation procedures, the tax authorities have added an additional layer of complexity and uncertainty to this process: in their opinion, liabilities that remain with the company after all assets have been sold should lead to a taxable gain when the company is liquidated. Even if sufficient net operating loss (NOL) carryforwards are available to theoretically cover this gain, the minimum taxation rules would, in most cases, result in a cash tax liability for the company that is being liquidated. (Under the minimum taxation rules, the first EUR 1 million of current year profits may be offset against NOL carryforwards with no limitations, but only 60% of any excess current year profits may be offset against NOL carryforwards; the remaining 40% is subject to tax at the general rates.)

The case decided by the BFH concerned the liquidation of a limited liability company (GmbH). Nearly all assets had been sold; however, the company still had shareholder liabilities of approximately EUR 18 million. The company filed an application for a binding ruling with the responsible tax authorities, requesting confirmation that the final liquidation of the company would not lead to a taxable gain in the amount of the outstanding shareholder liabilities. The tax authorities did not agree with this position, and did not grant the binding ruling. The company challenged the tax authorities’ decision in the lower tax court, which decided in favor of the company and ordered the tax authorities to provide the requested (taxpayer favorable) binding ruling. The tax authorities then appealed the case to the BFH.

In its opinion, the BFH analyzed whether a tax court can review a decision of the tax authorities on whether to provide a requested binding ruling in an appeals procedure. In the view of the BFH (and contrary to the opinion of the lower tax court), the scope of a tax court’s review is limited to questions on whether the tax authorities fully understood the facts and whether the legal analysis provided by the tax authorities was conclusive and not obviously incorrect. Instead of providing a full legal analysis of the tax authorities’ decision on the application for a binding ruling, the BFH ruled that only a limited, high-level review could be carried out through a court proceeding and that, in the case, the tax authorities’ decision not to issue a binding ruling was in line with the relevant principles. Based on these grounds, the BFH overruled the lower tax court’s decision. The BFH, however, did not provide a full and final analysis of the question the taxpayer asked the tax authorities, which was part of the application for the binding ruling.

The BFH’s decision will not help resolve the controversial topic of the treatment of the remaining liabilities of a company in a liquidation. Even though the lower tax court decision included a clear and explicit statement against the opinion of the tax authorities (which is supported by tax literature), it should not be expected that the tax authorities will change their view. Based on their approach, there is a risk that the lifetime (tax) result of a company would not be able to be less than zero because, at the latest, the remaining liabilities of the company would be balanced by a deemed taxable gain during its liquidation. This result, however, is questionable from an economic point of view and seems to ignore reality. The risk of taxation of these deemed profits could lead to the result that companies that have stopped being active and are left with no attributes other than liabilities would be kept in existence in perpetuity instead of being liquidated. Alternative solutions such as the migration/merger of the company out of Germany or release through a transfer of the liability to a (foreign) related party also may not provide the necessary legal certainty.

Hopefully, the tax authorities will adopt a more business-oriented view in the future and will refrain from assessing a final tax on a company that already is over-indebted in these situations. Apart from the legal debate, it could be difficult to enforce a tax assessment notice against a company that has nothing left besides liabilities.

Contact

Andreas Maywald
Client Service Executive / German Desk New York

anmaywald@delitte.com
Tel.: +1 212 436 7487

Contact

Andreas Maywald
Client Service Executive / German Desk New York

anmaywald@delitte.com
Tel.: +1 212 436 7487

Share article:
Diese Webseite verwendet Cookies, um Ihnen einen bedarfsgerechteren Service bereitstellen zu können. Indem Sie ohne Veränderungen Ihrer Standard-Browser-Einstellung weiterhin diese Seite besuchen, erklären Sie sich mit unserer Verwendung von Cookies einverstanden. Möchten Sie mehr Informationen zu den von uns verwendeten Cookies erhalten und erfahren, wie Sie den Einsatz unserer Cookies unterbinden können, lesen Sie bitte unsere Cookie Notice.