The new exemption will largely depend on the continuation of the business operation of the loss-suffering company both before and after the share transfer, provided that no "harmful event" occurs. While welcome, the wording of the exemption leaves some uncertainty as to when it will apply.
Under the current change in ownership rules a direct or indirect transfer of more than 50 percent of the shares in a loss-suffering company results in the cancellation of the loss carry-forwards, interest carry-forwards and current year losses of the company, the shares of which are transferred. If more than 25 percent but no more than 50 percent of the shares are transferred, the losses are cancelled on a pro rata basis. Two exemptions exist from the general cancellation rule: the built-in gains exemption and the intra-group exemption. However, outside the scope of these two exemptions there may be situations where an economically desired recapitalization of a company requires the change in ownership which is currently hampered by the threatened loss cancellation.
The draft bill aims at introducing a new rule which provides for the possibility to retain loss carry-forwards, interest carry-forwards and current year losses in the event of an otherwise detrimental change in ownership if certain requirements are met. Under the proposed rule the loss cancellation shall not apply upon application where (i) the loss-suffering company has continued its business operation unchanged since its incorporation or at least for the last three fiscal years prior to the year in which the change in ownership occurred, and (ii) no harmful event has occurred. If the relief is granted, the existing loss carry-forwards, interest carry-forwards and current year losses would be retained and separately assessed as so-called "business continuation loss carry-forwards" (fortführungsgebundener Verlustvortrag).
Assessed business continuation loss carry-forwards may be utilized for so long as none of the following harmful events occurs:
- discontinuation of the business operation
- the business operation is made dormant
- change of the purpose of the business operation
- opening of additional business operation
- investment into a partnership
- establishment of an Organschaft as controlling entity
- transfer of assets to the loss-suffering company below fair market value
Losses may, however, be retained even if one of the above mentioned events occurs to the extent the requirements of the built-in gains exemption are fulfilled.
The main criterion for the proposed exemption is the unchanged continuation of the business operation before and after the otherwise detrimental change in ownership. For purposes of the rule "business operation" encompasses the "sustainable, complementary and supporting activities of a company which are based on a uniform intention to generate profits" and is defined by qualitative criteria which are (i) the services and products offered, (ii) the circle of customers and vendors, (iii) the markets serviced, and (iv) the qualification of the employees.
Although the proposed new law provides for a welcome additional relief from the tight loss cancellation rules, the wording of the provision and the legislative explanation are to some extent ambiguous and leave room for future discussions with the authorities whether the relief actually applies. Companies that want to benefit from the proposed exemption will have to document properly that the relevant business operation has been and is continued unchanged. Since the new rule does not contain a time limitation for the harmful events, the company will have to monitor and carefully structure any changes in its business activities for so long as it has business continuation loss carry forwards in order to avoid jeopardizing their existence.
If implemented as currently drafted the new rule will apply for share transfers that occur after 31 December 2015 and will cover both corporate income tax and trade tax losses.