1. Current legal situation

Section 8c of the Corporate Income Tax Act (KStG) provides that an industrial & manufacturing group company’s current or carried forward tax losses are totally or partially forfeited in case of a direct or indirect ownership change. Exemptions are only applicable for transactions in 100% controlled groups and to the extent that taxable built-in gains in assets exist at the level of the loss entity.

2. Proposed new regulations to relieve curtailment of loss utilisation

The German legislator introduced a draft law in September 2016 in order to allow more corporations which includes industrial & manufacturing businesses which have German subsidiaries to use tax losses after a change of ownership.

In general the draft law would allow corporations to utilise losses upon a change in ownership if the business has been operating exclusively with the same business purpose for the last three years before the change in ownership or since its foundation if it was less than three years before.

However, all losses carried forward or remaining losses would nonetheless be forfeited after the change of ownership if any of the following occurs:

• termination of business activities

• change of business purpose

• taking up an additional or new business activity

• participation of the corporation in a co-entrepreneurship (trading partnership)

• corporation becomes parent in a tax group

• contribution of assets into the loss corporation at less than fair market value.

Whether the business purpose is regarded as the same after the change of ownership depends on numerous factors. Such factors include, e.g. whether the products or services offered, the customer and supplier relationships, the markets served or the qualification of staff, are the same or similar after the change in ownership.

In addition, the new provisions would also apply for interest carried forward.

The new provisions would only be available for taxpayers upon application and verification by the tax authorities.

3. Commencement date

The new rules would apply to all changes in ownership as of 1 January 2016.

The draft law is currently being debated in the German Parliament and the German Federal Assembly with the aim to pass the draft law by end of the year. However, any modifications during this process cannot be discounted.

Industrial & manufacturing businesses involved in the acquisition or disposal of German subsidiaries should therefore plan to ensure losses are protected wherever possible when the new rules come into force.