11. May 21

BFH rules on recognition of stock losses for tax purposes

Losses from shares in companies facing insolvency can be claimed against tax from the point in time when the shares are written off the securities account. That was the verdict of the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court (Az.: VIII R 20/18).

The Bundesfinanzhof has delivered an important ruling on losses from shares in companies facing insolvency. We at the commercial law firm MTR Rechtsanwälte can report that, according to the court’s judgment from November 17, 2020, if the bank writes off these shares from the investor’s securities account before the company is deleted from the register, this gives rise to a loss that can be claimed against tax.

If the shareholder’s membership rights are extinguished because the company is dissolved, wound up and deleted from the register due to insolvency, and the shareholder does not regain all or part of their investment, they incur a taxable loss according to the BFH. If the shares are written off the shareholder’s securities account before the company is deleted from the register, the loss is deemed to have be realized at the point in time when the shares were written off.

The BFH went on to note, however, that it cannot be assumed that a loss has already been incurred at the point in time when an individual distribution of assets as part of the final distribution of the company's assets is objectively no longer expected or the listing on the stock exchange is discontinued.

The plaintiff in the case in question had acquired private assets in the form of shares in a publicly listed German stock corporation in 2009. The company subsequently became the subject of insolvency proceedings in 2012, with a unit price still being quoted for the shares in the plaintiff’s securities account as of December 31, 2013. The plaintiff then sought to have the total loss offset for 2013 income tax purposes against gains he had realized from the sale of shares in that year.

However, this request was dismissed by the BFH, which ruled that the version of the German Income Tax Act (Einkommensteuergesetz, EStG) in force during the relevant year contained an unintended loophole, according to which the plaintiff had not incurred a loss on disposal in 2013, as his membership rights in the company had not yet been extinguished and the shares were still being held in the securities account. The court therefore concluded that while the plaintiff had indeed suffered a depreciation in value, this did not yet amount to a taxable loss.

The ruling has implications for failed equity investments between the years 2009 and 2019. The legal loophole has been closed for tax assessment periods starting from 2020.

Lawyers with experience in the field of tax law can provide counsel.

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