Insolvency-related dissolution of a GmbH: When does a tax loss realization occur?
The question of when, in the event of insolvency, a tax loss realization is to be assumed in connection with a shareholding in a GmbH is of significant importance for shareholders. The Fiscal Court of Düsseldorf addressed precisely this issue in a recent decision (Ref. 10 K 1175/19 E; Source: urteile.news) and made key clarifications. The decision is highly relevant not only for shareholders but also for advisors and companies.
Initial situation: Insolvency proceedings and dissolution of the GmbH
If insolvency proceedings are opened over the assets of a GmbH, this, pursuant to § 60 (1) no. 4 GmbHG, automatically leads to the dissolution of the company. The opening of insolvency proceedings is therefore necessarily linked to the commencement of the liquidation phase, which aims at the legal termination of the company.
For the tax treatment of shareholding losses pursuant to § 17 (4) EStG, however, it is crucial to determine when such a loss is actually deemed to be realized – particularly in the context of the disposal or complete termination of the shareholding.
Loss realization under § 17 EStG – Key criteria
Definition of tax realization
A tax realization of the loss generally only occurs when the economic value of the shareholding has been finally lost. The mere opening of insolvency proceedings, or the legally mandated dissolution that follows, does not, according to established case law, constitute the point of realization.
Turning point: Complete distribution of assets
Even prior to the decision of the Düsseldorf Fiscal Court, the Federal Fiscal Court and other courts had clarified that, for loss realization, the relevant time is when shareholders can no longer expect any distribution from the company’s assets. In insolvency, this typically means the end of the proceedings and the deletion of the company from the commercial register. Only in exceptional cases – for example, when the complete worthlessness is established early – can an earlier point in time be considered, provided that all liabilities have been fully settled and the possibility of recovery for the shareholder no longer exists.
Practical relevance in light of the Düsseldorf Fiscal Court’s decision
No premature tax consideration of losses
In its judgment, the Düsseldorf Fiscal Court confirmed the established case law: The opening of insolvency proceedings and the resulting dissolution do not in themselves lead to a tax-relevant loss being considered. Rather, the decisive factor remains the actual termination of the GmbH – as a rule, evidenced by the deletion of the company from the commercial register after final liquidation or termination.
The decision makes clear that a premature recognition of losses contradicts the principle of tax realization, as it cannot yet be determined at that time whether the shareholder may still receive an economic distribution — for example, from a distribution of assets.
Typical sources of error and delimitation issues
Shareholders of insolvent GmbHs are well advised to carefully distinguish between the timing and conditions for the tax recognition of losses. It is often erroneously assumed that the mere opening of insolvency proceedings and the dissolution of the company under company law already result in a tax-deductible loss that can be recognized immediately. As the Düsseldorf Fiscal Court’s decision shows, this can lead to significant corrections during a tax audit.
Significance for investors and companies
For investors, companies, and their advisors, it is essential to be aware of the strict requirements for tax loss realization upon exit from a corporation. In particular, for shareholdings affected in the course of funding rounds or as a result of corporate contribution obligations, the tax consequences should be examined carefully.
Outlook: No automatic recognition of losses
Current case law supports the position that, in structuring share transfers for tax purposes or in the case of insolvency proceedings, one should not hastily assume that a loss has been realized. Anyone attempting to claim such purported losses prematurely risks having to accept later corrections and possibly increased tax burdens. It is therefore advisable to follow developments in this area closely and to seek qualified advice in case of uncertainties.
Note
At the time of publication, the decision of the Fiscal Court of Düsseldorf is not yet final; an appeal has been lodged with the Federal Fiscal Court and the final ruling is still pending.
If you have legal questions regarding the tax treatment of shareholding losses, corporate dissolutions, or insolvency cases, the lawyers at MTR Legal are available as your contact nationwide and internationally.
