The Bundesfinanzhof (BFH, Federal Fiscal Court) has ruled that Section 8c KStG (German Corporation Tax Act) does not preclude the tax-reducing offset of negative income from the period before a harmful acquisition of an ownership interest against loss offset capacity arising in the previous year (BFH, decision of July 16, 2025 – I R 1/23 (case number), ECLI:DE:BFH:2025:U.160725.IR1.23.0). The decisive factor is that the negative income was incurred within the fiscal year before the date of the harmful acquisition of the ownership interest. The positive aggregate income of a preceding assessment period may constitute loss offset capacity.
BFH Permits Loss Carryback Despite Section 8c KStG
In its decision, the BFH departed from the previous position of the tax authorities. They had assumed that Section 8c KStG also precluded a carryback of the losses concerned to preceding assessment periods.
According to the decision, the restriction on loss deductions does not cover negative income from the period before the harmful acquisition of the ownership interest to the extent that it can be carried back within the limits of Section 10d(1) EStG (German Income Tax Act) and offset against positive aggregate income from an earlier assessment period. This does not result in any general limitation of the legal effects of Section 8c KStG in the event of a change of shareholder. Rather, the ruling concerns the specific offset against loss offset capacity that had already arisen in the previous year.
Tax Authorities Amend Their Administrative Position
In response to the BFH decision, the tax authorities amended the BMF Circular of November 28, 2017 (Federal Ministry of Finance Circular). The revised version specifies which unused losses are covered by the restriction on deductions under Section 8c KStG and how a harmful acquisition of an ownership interest during the fiscal year is to be treated.
Losses Covered by the Restriction on Deductions
Under the amended administrative position, Section 8c KStG applies to all negative income that has neither been offset nor deducted. These unused losses include in particular:
- Loss carryforwards under Section 10d EStG, including loss carryforwards of a tax group subsidiary originating from the period before the tax group was established.
- Losses within the meaning of Sections 2a, 15(4), 15a and 15b EStG.
- Assessed remaining loss carryforwards within the meaning of Section 10(3), sentence 5 AStG (German Foreign Tax Act).
Harmful Acquisition of an Ownership Interest During the Fiscal Year
If the harmful acquisition of an ownership interest occurs during the fiscal year, the loss incurred up to that date is generally also subject to the restriction under Section 8c KStG. However, this applies only to the extent that the loss cannot be carried back to preceding assessment periods within the limits of Section 10d(1) EStG and deducted there from positive aggregate income.
Profit generated up to the harmful acquisition of the ownership interest may be offset against unused losses. The aggregate income generated up to the date of the harmful acquisition of the ownership interest must be used in each case to determine the relevant profit or loss.
An acquisition of an ownership interest is not deemed to have occurred during the fiscal year if the transfer takes place at the end of the calendar year or fiscal year.
Consequences for Reorganizations with Retroactive Tax Effect
The amended principles also apply to situations in which, following the harmful acquisition of the ownership interest, the loss-making company is reorganized into another legal entity with retroactive tax effect pursuant to Section 2 UmwStG (German Reorganization Tax Act). This requires the effective tax transfer date to precede the harmful acquisition of the ownership interest.
Closing Tax Balance Sheet and Transfer Gain
In these reorganization cases, it must be examined how tax refund claims resulting from the carryback of negative income affect the transaction. The review concerns in particular:
- the valuation of the transferred assets in the closing tax balance sheet pursuant to Section 11 UmwStG;
- the determination of the transfer gain pursuant to Section 12(2) UmwStG.
The amended administrative principles must be applied to all cases that remain open.
Significance for Tax Treatment
The BFH decision defines the scope of Section 8c KStG where a harmful acquisition of an ownership interest occurs during the fiscal year. Subject to the requirements of Section 10d(1) EStG, it permits negative income incurred before the acquisition of the ownership interest to be carried back and offset against the previous year’s loss offset capacity. The application of the restriction on loss deductions in all other respects remains unaffected.
For questions concerning the scope of the decision, the amended administrative position or the effects in reorganization cases, MTR Legal advises companies, investors and high-net-worth individuals as part of its tax law advisory services.
