Germany generally allows companies to carryforward both corporate income tax and trade tax losses indefinitely. However, from 1 January 2004, the utilization of loss carry-forwards is limited to 60% of annual taxable profits in excess of EUR 1 million.
In addition, for corporate income tax purposes, a one-year loss carryback is allowed up to EUR 1 million (for losses generated prior to 2013, the carryback limit is EUR 511,500).
In response to the COVID-19 pandemic, Germany announced an increase in the loss carry-back relief for losses incurred in the years beginning from 2020 until 2023, from EUR 1 million to EUR 10 million (increased from EUR 5 million) and from EUR 2 million in the case of a joint assessment to EUR 20 million (increased from EUR 10 million). From the year 2024, the earlier thresholds of EUR 1 million and EUR 2 million will be restored.
The deduction of capital losses resulting from the disposal of business assets is generally permitted. However, capital losses resulting from the disposal of shares/investments in other companies are not deductible, as the gains from such disposal are exempt from tax.
A loss-trafficking rule was implemented on 1 January 2008 to restrict the carry-forward of losses when there is a direct or indirect change in share ownership of a loss-making entity. When there is a greater than 50% change of share ownership within a five-year period, the loss carry-forward prior to the change is forfeited. When there is a 25% to 50% change in ownership, i.e., qualified minority interest, within a five-year period the loss carry-forwards are forfeited proportionately. However, in 2016, the German Upper House of the Parliament approved legislation that would allow the carry-forward of losses upon a change of ownership in certain cases that would have otherwise been disallowed. Under the amended rules, carry-forward of losses would be allowed in full, provided the restructured company had been operating exclusively with the same business purpose for the three years immediately prior to the change in ownership or since the date of its incorporation. However, the losses would be forfeited if the business operations are subsequently discontinued or changed and in certain other cases.
There are certain exceptions to the rule, including:
- Changes involving a group reorganization and the single ultimate shareholder remains the same (this includes direct or indirect transfers where the receiving entity directly or indirectly owns 100% of the transferring entity, or the transferring entity directly or indirectly owns 100% of the receiving entity);
- When the loss carry-forward is covered by a hidden reserve that will lead to German taxation upon a realization; and
- In the case of restructuring an insolvent company (reinstated following the judgment by CJEU on 28 June 2018, through the Annual Tax Law, 2018).
On 12 May 2017, the German Federal Constitutional Court ruled that certain aspects of the loss carry-forward restrictions in relation to change of ownership were unconstitutional viz. partial forfeiture of losses on the transfer of qualified minority interest, without considering other criteria, such as continuity of business. Hence, the Court directed to amend the provisions by 31 December 2018, with retroactive effect from 1 January 2008 to 31 December 2015.
On 30 November 2017, the German Finance Ministry clarified that the loss forfeiture rule shall not apply in case of a direct acquisition of 25% to 50% ownership before 1 January 2016, until a new provision is introduced. Further, the circular also clarified that in case of a harmful share acquisition during the tax year, losses may be set off against profits arising in the period before the harmful acquisition.
On 23 November 2018, under the Annual Tax Law, 2018, the partial loss forfeiture restriction in respect of 25% to 50% change in ownership has been removed with retroactive effect from 1 January 2008 (i.e., for transfers after 31 December 2007).
Further, on 22 January 2020, the European Commission (EC) announced that German tax loss carry-forward rules are compatible with the EU State aid rules. A German reorganization tax measure permits ailing companies to carry-forward tax losses and applies them to profits in future years, despite changes in the company shareholder structure. The EC held that the measure does not constitute State aid within the meaning of the EU rules since it conforms with general German tax loss carry-forward rules and doesn’t provide a selective advantage to ailing companies over other companies.