18.08.2025Tax court clarifies application of change-in-ownership rules for tax consolidations
Decision allows consolidation of current year losses of controlled subsidiary incurred prior to mid-year change in ownership
The lower tax court of Duesseldorf, in a decision dated 9 December 2024 and published on 15 May 2025, clarified the application of the German change-in-ownership rules in cases where a tax consolidated group (“Organschaft”) has a harmful ownership change during the course of a fiscal year (FY). The lower tax court decided against the interpretation of the German tax authorities and decided that a loss occurring at the level of a controlled subsidiary before a mid-year harmful ownership change may still be offset against the current year income of the tax consolidated group. The tax court rejected the tax authorities’ argument, based on the mechanics of the profit and loss (P&L) pooling agreement, that the controlled subsidiary’s current year loss should be forfeited entirely as a result of the mid-year harmful ownership change.
Background
Under the German tax consolidated group rules, the profits and losses of companies that are part of a tax consolidated group are offset against each other and consolidated for income tax and accounting purposes. The concept of a German tax consolidated group is based on a P&L pooling agreement (which is a valid legal agreement) whereby the controlled subsidiary has the legal obligation to transfer its entire annual profit to the parent entity at the end of its FY. In case the controlled subsidiary incurs a loss, the parent company is required to compensate its subsidiary for the loss.
According to the German change-in-ownership rules of section 8c of the Corporate Income Tax Code, a harmful ownership change occurs if more than 50% of a company’s shares are directly or indirectly transferred to a new shareholder, related parties, or parties acting in concert. All ownership transfers occurring within a five-year period are combined for purposes of the 50% test. As a result of the application of the change-in-ownership rules, the net operating loss (NOL) carryforwards, interest carryforwards, and current year losses of an entity are forfeited, unless an exception applies. Based on the business continuation clause in German tax law, the tax attributes mentioned above remain available after a harmful ownership event if the business of the loss corporation remains the same during at least three full calendar years before the ownership change and remains the same after the ownership change. However, the business continuation clause provides that this exception does not apply to tax attributes at the level of the group’s controlling parent entity.
According to 2017 guidance from the tax authorities, the change-in-ownership rules must be applied separately at the level of the controlling parent entity and each controlled subsidiary. As a result, current year losses of group companies that are incurred before the date of the harmful ownership change are forfeited on a separate entity basis and cannot be considered for purposes of the tax consolidation. As the transfer of profits/losses under the mechanics of the P&L pooling agreement occurs only at the end of the FY, a consolidation of mid-year results is not possible, and losses have to be considered on a stand-alone basis for purposes of the change-in-ownership rules.
Decision of the lower tax court
The lower tax court of Duesseldorf ruled in favor of the taxpayer and contrary to the tax authorities’ guidance. It concluded that the current year losses incurred by the controlled subsidiary prior to the disposal of the shares may be offset with a profit at the level of the parent company and should not be forfeited.
The court also confirmed that this result should not only apply for federal corporate income tax (CIT) purposes but also for local trade tax (TT) purposes.
Other tax attributes—such as CIT and TT NOL carryforwards and interest carryforwards at the level of the controlled subsidiary (“pre-Organschaft losses”)—generally should be fully forfeited in the event of a harmful change of ownership, provided no exception applies.
The lower tax court also decided that, in the case of a tax consolidated group with several tiers of companies where one of the controlled subsidiaries also is a controlling parent entity of another tax consolidated group, the business continuation clause should not apply at the level of the company that acts as both the controlling parent entity and a controlled subsidiary.
Deloitte Germany’s comments
The decision of the lower tax court is in line with previous decisions of the federal tax court, which held that, in case of entities that are not part of a tax consolidated group, a current year profit generated before a harmful ownership change can still be offset against NOL carryforwards, i.e., NOL carryforwards may be used until the date of the harmful ownership change. The decision of the lower tax court can be seen as an extension of these principles to current year losses within a consolidated group.
The decision favorably clarifies a longstanding discussion regarding the application of the change-in-ownership rules in case of a tax consolidated group. The tax authorities have appealed the decision to the federal tax court. Whether the latter will agree with the decision of the lower tax court remains to be seen.
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