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URL: http://www.deloitte-tax-news.de/german-tax-legal-news/constitutionality-ofminimum-taxation-rules-referred-to-federal-constitutional-court.html
16.09.2014
Constitutionality of minimum
taxation rules referred to Federal
Constitutional Court
On 26 February 2014, the Federal Tax Court (BFH) referred to the
Federal Constitutional Court the question of whether the minimum
taxation rules are in line with German constitutional principles. The
BFH specifically requested a ruling on the application of the
minimum taxation rules in circumstances in which their application
results in the definitive forfeiture of the ability to use net operating
loss (NOL) carryforwards. The BFH is of the opinion that the rules
violate the German constitution, but the court lacks the authority
to hold a law unconstitutional.
Under the minimum taxation rules, current year profits of up to EUR 1 million can be
offset with NOLs carried forward from previous years without limitation. Only 60% of
current year profits in excess of the EUR 1 million ceiling can be offset with any
remaining NOLs carried forward―any amount not so offset is then subject to
corporate income tax and trade tax at the normal rates. Unutilized NOLs carried forward
then are available for set off in the following year (again subject to the minimum taxation
rules). The consequences of the minimum taxation rules, which have been in force
since 2004, are that the ability to use NOLs carried forward is spread over a number of
years and that tax may become payable in a particular year, even if (looking at the bare
numbers) sufficient NOLs carried forward are available to shelter the taxable profit of
that year.
The case at issue involved a German limited liability company that reported a loss for
tax purposes in its 2004 tax return as a result of having to write-off a receivable in that
year. Two years later, the write-off had to be reversed, resulting in a taxable profit for
2006. In the meantime, the company became insolvent, finally being liquidated in 2008.
The 2006 profit resulted in the company having to make a cash tax payment since,
under the minimum taxation rules, it was not able to fully offset the 2006 profit with the
NOL carryforwards deriving from 2004. Further, the unutilized NOL carryforwards was
finally and definitively forfeited, since the company was liquidated before the losses
could be set off against profits of subsequent years.
It is important to note that the BFH is not of the opinion that minimum taxation rules in
general violate constitutional principles. In its referral decision, the BFH analyzes the
consequences of the minimum taxation rules in depth and concluded that the general
mechanism that has the effect of spreading the ability to use NOLs carryforwards over a
number of years is in line with constitutional principles. It is only where the application
of the minimum taxation rules results in the final and definitive forfeiture of the ability to
use NOL carryforwards that the BFH considers unconstitutional.
The case is now pending before the Federal Constitutional Court and it is unlikely that a
decision will be handed down in the near future. If the Federal Constitutional Court
ultimately agrees with the BFH, the German government may need to amend the
current rules to ensure that the restriction on the ability to use NOL carryforwards does
not apply in circumstances where the ability to use the carryforwards would otherwise
be definitely forfeited.
Contact
Andreas Maywald | German Desk New York
Client Service Executive
[email protected]
+1 212 436 7487
www.deloitte-tax-news.de
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