14.08.2025Minimum taxation rules do not violate constitutional principles
Unequal treatment that may apply to taxpayers unable to fully use NOL carryforwards is justified by objective reasons.
In a decision dated 23 July 2025 and published on 11 August 2025, the German federal constitutional court (BVerfG) upheld the corporate minimum taxation rules that have been in effect since 2004. The BVerfG did not follow the view of the federal tax court which was of the opinion that the minimum taxation rules violate constitutional principles. The federal tax court had referred the question of constitutionality to the BVerfG as it lacks the authority to hold a law unconstitutional (see GTLN dated 09/16/2014).
Based on the German minimum taxation rules, current year profits of up to EUR 1 million may be offset with net operating loss (NOL) carryforwards from previous years without limitation. However, only 60% of current year profits in excess of EUR 1 million may be offset with any remaining NOL carryforwards, with any residual profits subject to corporate income tax (CIT) and trade tax (TT) at the regular rates. The original 60% limitation is increased to 70% for CIT purposes for the period from 2024 through 2027; for TT purposes the standard 60% limitation remains unchanged for this period. Unutilized NOL carryforwards are available for offset in the following year (again subject to the minimum taxation rules). The consequences of the minimum taxation rules are that the ability to use NOL carryforwards is spread over several years and that tax may become payable in a particular year, even if (looking simply at the numbers) sufficient NOL carryforwards are available to shelter the taxable profit of that year. This becomes particularly apparent in situations where companies are liquidated or cease their business activities as they may result in NOL carryforwards that can no longer be used (the so-called “definitive effect”).
In the case at hand, a German limited liability company reported a loss for tax purposes in its 2004 tax return as a result of having to write off a receivable in that year. Two years later, the write-off had to be reversed, resulting in a taxable profit for 2006. In the meantime, the company became insolvent and ceased its business activities. The 2006 profit resulted in the company having to make a cash tax payment, since, under the minimum taxation rules, it was not able to fully offset the 2006 profit with the NOL carryforwards generated in 2004. Further, the unutilized NOL carryforwards were finally and definitively forfeited, since the company ceased its business activities before the remaining losses could be offset against profits of subsequent years. The taxpayer claimed that the application of the German minimum taxation rules resulted in the taxation of fictitious profits and therefore violated the constitutionally guaranteed ability-to-pay principle
The BVerfG in its decision clarified that the minimum taxation rules do not violate the general principle of equality (article 3 (1) of the Basic Law). In the court’s opinion, the unequal treatment that might apply to taxpayers that are unable to fully use NOL carryforwards based on the application of the minimum taxation rules is justified by objective reasons, in particular by the goal of continuous and current taxation to stabilize tax revenues. Even in special situations where a definitive effect applies, the court does not consider the effects of the minimum taxation rules to be unconstitutional. The BVerfG also stated that the concept of the minimum taxation rules meets the constitutional requirements for standardization of tax procedures.
As a result of the BVerfG’s decision, taxpayers must continue to apply the German minimum taxation rules. This applies even where the termination of the business activities results in a definitive effect. According to the decision, it may be possible to mitigate or remove the disadvantageous tax effects resulting from this definitive effect through equitable relief measures granted by the tax authorities, although it remains to be seen what requirements the tax authorities would apply to grant such relief.
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