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Germany: Corporate income tax

In 2013 the German legislator renewed section 14, par. 1, no 5 of the German Corporate Tax Act (GCTA). The new rule limits the utilisation of tax losses in fiscal unities (the German group taxation system) in cross- border situations to avoid double-dips. Since the wording has been kept very general and far-reaching, it is highly discussed if the limitation could also be applicable on 'normal' cross-border structures. The new rule shall apply not only for future tax assessments but also to all tax assessments of former years that are not yet final and conclusive.

The new no. 5 in section 14, par. 1 of the GCTA determines that a loss of a German company that is part of a fiscal unity is not acknowledged for German taxation purposes, if the loss can be considered for tax purposes in another country as well. According to the supposed intention of the legislation this new rule should ban structures that allow the deduction of a loss in two tax regimes (Germany and abroad) while economically the loss has only occurred once.

The (general) wording of the rule covers all situations where a loss is somehow “considered” for taxation purposes in Germany and in another country. This could have negative effects on very common cross-border structures, especially where the tax system of the foreign state applies the credit method.

Some US-investments in Germany, for example, could be affected. US companies often invest in an active German company via a German hold-co that is formed as a transparent partnership (e.g. German KG) to improve their withholding tax situation. In such structures the active German company is often integrated in the German hold-co by a fiscal unity. If in such a structure the active German company suffers a loss, this loss is considered for German (corporate and trade) tax issues at the level of the German hold-co (KG) and – due to the credit method – also in the US for the determination of the taxable US-income of the investing US company. Although this cannot be seen as a double-dip structure, the broad wording of the new rule in section 14, par. 1, no 5 of the GCTA is triggered and limits the deduction of the loss for German tax purposes.

It is the general consensus in Germany that the new rule should not be applied on legitimate international structures by using a restrictive interpretation of the wording of the new rule. In addition, the retroactive application may not be compatible with German constitutional law. However, as long as the wording of the new rule has not been changed or clarified by the German legislator, it must be assumed that the German tax authorities will opt for a broad interpretation and apply the new rule to all potentially relevant structures – including common legitimate cross border structures.

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