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German tax loss forfeiture rules unconstitutional, says court

German rules concerning the forfeiture of corporate income tax (CIT) losses carried forward in the case of a change in a company's ownership have been declared unconstitutional by the German Constitutional Court.19 May 2017

The German CIT code provides that tax losses carried forward will be forfeited pro-rata if between 25 per cent and 50 per cent of a company's shares have been transferred within a five year period.  

The Constitutional Court has decided that the tax loss forfeiture rules that applied from 1 January 2008 to 31 December 2015, in relation to the transfer of 25-50% of shares are unconstitutional because they violate the principle of equality in the German constitution.

The German legislator has until 31 December 2018 to retroactively amend the rules to make them consistent with the German constitution.

The German CIT code also provides for the entire forfeiture of CIT losses carried forward in the case of share transfers of more than 50 per cent. However, these rules were not the subject of this decision and so remain unaffected.

The rules relating to the forfeiture of losses on a transfer of 25-50% of a company's ownership were amended with effect from 1 January 2016.

Werner Geisselmeier, an expert on German tax at Pinsent Masons, the law firm behind Out-Law.com, said: "This decision only relates to the rules in force from 1 January 2008 to 31 December 2015, so does not affect the rules as they are now. However, anyone who receives a CIT losses carried forward assessment notice in respect of the affected period should object to it in order to be able to benefit from a future change in law to make the rules comply with the German constitution."