In its decision from 26 August 2010 (I B 49/10), the Federal Fiscal Court (Bundesfinanzhof, BFH) once again raised concerns over the constitutionality of the so-called minimum taxation rule in the case of a definite exclusion of loss offsetting.
In the course of a stay of execution, the BFH dealt in a summary procedure with Sec. 10d (2) s. 1 Income Tax Act (ITA), which provides for a limited use of tax loss carry forwards. Losses, which cannot be set off in the assessment period in which they have been generated, might generally be carried forward, but are subject to certain limits. Within each future tax assessment period, tax loss carry forwards are fully deductible only in an amount up to 1,000,000 € and, exceeding such amount, only up to 60% of the taxable income. As a result, 40% of the positive taxable income will be subject to taxation irrespective of possible losses of prior assessment periods (with exception of losses less than 1,000,000 €).
The claimant in this proceedings was a German limited liability company, whose legal predecessor had tax loss carry forwards in the amount of 35,303,643 € on 31 December 2006. Due to the provision of Sec. 10d (2) s. 1 ITA, the tax loss carry forwards were set off only partially in 2007, the year in question. In 2008, a change of control of the claimant’s shareholders and a merger led to a final loss of remaining tax loss carry forwards.
In accordance with prior jurisprudence (cp. decision from 27 January 2006, VIII B 179/05) and the jurisprudence of the Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) (cp. decision dated 30 September 1998, 2 BvR 1818/91), the BFH considers it in principle admissible to limit the loss offsetting due to fiscal interests and to temporally limit the use of tax loss carry forwards in order to strengthen and perpetuate tax revenues. Such limitation should not infringe the so-called net principle stemming from the rule of equality provided by Art. 3 (1) of the German Constitution (Grundgesetz, GG) as long as the future use of tax loss carry forwards remains possible and only the point in time is undetermined. According to continuous jurisprudence, the net principle provides protection only with respect to several assessments periods as a whole.
From the BFH’s point of view, the minimum taxation rule applicable to tax loss carry forwards exceeding 1,000,000 €, might raise concerns regarding its constitutionality in the case that the limitation of the use of tax losses leads to a definite effect. Such definite effect might occur if the use of tax losses will be completely precluded due to factual or legal reasons and will not only be suspended to future tax periods.
Against this background, concerns regarding the constitutionality of the limitation of use of tax loss carry forwards by means of the minimum taxation rule were raised in the case at hand due to the fact that all losses of the claimant perished in consequence of a change of control and a merger pursuant to Sec. 8c Corporate Income Tax Act (CTA) respectively Sec. 12 (3) in connection with Sec. 4 (2) s. 2 Reorganization Tax Act (RTA). Accordingly, the use of the tax losses became impossible in the future. In this context, the BFH disregarded the fact, that the definite effect of the minimum taxation rule was based upon the reorganization of the claimant, i.e. the independent will of the taxpayer (also Fiscal Court Munich, decision dated 31 July 2008, 8 V 1588/08; different Fiscal Court Munich, decision dated 4 August 2010, 1 K 608/07).
Based on such concerns, the BFH regarded the stay of execution as justified. From its perspective, the concerns regarding the constitutionality of Sec. 10d (2) s. 1 ITA might only be encountered by an interpretation of the provision bearing in mind the constitution and its principles in order to minimize the excessive effects of the limitation of use of tax losses. Such interpretation would result in a nonapplicability of Sec. 10d (2) s. 1 ITA in the case that the use of tax losses would be impossible in the future due to factual or legal reasons. Such interpretation could be procedurally implemented by means of a provisional tax assessment pursuant to Sec. 165 (1) s. 1 General Tax Code (AO). Alternatively, the incident resulting in the definite tax loss could be regarded as retroactively effective in terms of Sec. 175 (1) s. 1 No. 2 AO.
Irrespective of the fact, that the BFH did not have to take a final position with respect to the constitutionality of the minimum taxation, its decision is in line with the decision of the Fiscal Court of Hesse regarding the parallel provision of Sec. 10a Trade Tax Act (TTA) (cf. decision dated 20 September 2010, 8 K 2285/09 and decision from 26 July 2010, 8 V 938/10) which have already been commented on in the previous TaxInfo 01/2011. This reveals that the minimum taxation due to the limitation of use of tax losses comes under more rigorous criticism.