Vol 7 (2010) - Issue 3

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Tax Obstacles for Corporate and Business Restructurings and Tax Provisions Exacerbating a Financial Crisis: Recent Developments in Germany

I. Background
Owing to the current global financial and economic crisis, many companies and businesses are facing financial problems. Often, such problems cannot be overcome by simply undertaking a debt restructuring. In fact, entire companies or businesses need to be restructured. Under German general tax law, corporate and business restructuring may have adverse tax consequences that may impede or prevent such restructuring, or may reduce its chances of success. Even if restructuring can be carried out without tax obstacles or is not necessary for the rescue of the struggling company or business, adverse tax provisions concerning ongoing taxation may result in a tax burden for such companies or businesses that may further exacerbate their financial crisis. Against this background, the German tax legislator recently adopted a number of amendments to German tax law that are intended to (i) abolish tax obstacles for corporate or business restructuring (see II below), and (ii) to attenuate tax provisions that worsen companies’ or businesses’ financial crises (see III below). This article will give an overview of these developments.

II. Tax obstacles for corporate and business restructurings

1. Anti-loss trafficking provisions

a) Background For many years, German tax law has contained anti-loss trafficking provisions. The relevant provisions currently in place were introduced within the framework of the 2008 Business Tax Reform Act (Unternehmensteuerreformgesetz 2008). According to Section 8c(1) of the German Corporation Tax Act (Körperschaftsteuergesetz; GCTA), all unused losses (in particular, loss carry-forwards and current losses) at the level of a corporation (Körperschaft) partially or totally expire in the event of more than 25% or 50% of the shares in such a corporation being directly or indirectly transferred to a single acquirer, several related acquirers, or a group of acquirers with aligned interests. The same holds true for trade tax deficits to the extent they are directly or indirectly (through co-entrepreneurship) allocated to the loss-making corporation.