Background
The forfeiture of losses in the event of a harmful change of ownership (Sec. 8c Corporate Tax Act/CTA) was identified as a considerable restructuring barrier during the financial and economic crisis in 2008. In the course of the “Buergerentlastungsgesetz Krankenversicherung” of 16 July 2009 an extraordinary insolvency restructuring rule was inserted into Sec. 8c (1a) CTA with retroactive effect as of 1 January 2008 according to which the purchase of shares for restructuring purposes is not harmful and thus does not lead to a forfeiture of losses.
Conclusion of the European Commission and reaction
The legislator did not present the restructuring clause to the European Commission for state-aid investigation purposes. However, the European Commission soon got wind of this through press releases and stated in the decision of 26 January 2011 that the restructuring clause was a state-aid regulation inconsistent with European law. The forfeiture of losses in the event of the acquisition of shares forms the reference system. The restructuring clause provides an unjustified selective advantage to certain companies. The Commission instructed Germany to reclaim the granted tax advantages. The application of the restructuring clause has been suspended until this decision is repealed.
The federal government filed a lawsuit against the decision at the Court of the European Union. As it arrived one day too late the court dismissed the lawsuit as inadmissible. This was followed by several lawsuits by companies which the Court of the European Union judged in line with the Commission’s opinion. In the appeal procedures by the company Heitkamp BauHolding GmbH at the European Court of Justice, the Advocate General has now declared in his conclusions that the restructuring clause would not infringe on European state-aid law and proposes that the European Court of Justice declare the decision of the European Commission null and void.
Arguments put forward by the Advocate General
The determination of another reference system was decisive for the Commission’s diverging investigation result. The reference system is formed by the possibility to offset losses according to Sec. 10d Income Tax Act/ITA in connection with Sec. 8 (1) CTA. The loss forfeiture rules according to Sec. 8c CTA constitute an exemption from this regulation. The restructuring clause therefore does not represent an exemption from the reference system, but rather leads back to the reference system.
Outlook
It is not unlikely that the court will follow the arguments of the Advocate General. The reintroduction of the restructuring clause would be an advantage for taxpayers, but would raise new questions again. In individual cases, for example, the use of the restructuring clause would have to be weighed against the application of going-concern loss carry forwards (“fortführungsgebundene Verlustvorträge”) according to Sec. 8d CTA.