Loss utilization will improve

Federal government decides on tax incentives for companies

It is an important signal for the company-founding location of Germany: On September 14, 2016 the Federal Cabinet adopted the "Draft law for the further development of the tax loss adjustment corporations". The new regulation provides for an extension of previous tax loss utilization and in particular should significantly ease access to investment and venture capital for founders, especially in the growth phase of their company.

To date: According to the provision of § 8c Corporation Tax Act (KStG), unused losses are canceled if share acquisitions of a corporation are made in certain amount. The loss can only be prevented if there are sufficient hidden reserves (for example IP) available. This is intended to prevent speculations with companies that are only interesting because of their losses. Especially in young companies during the growth phase it is often the case that the structure of the shareholders changes - for example when a new investor steps in. But without the opportunity of claiming tax losses getting involved a start-up is significantly less attractive for an investor.

That is now set to change. With effect retroactive to January 1, 2016, despite a change of qualified shareholders the unused losses can still be used if the company continues the "same business operations" and if other loss utilizations are excluded. In the future in addition to the existing provisions of § 8c KStG, there will be a new § 8d KStG for "allowance for losses that are tied to continuation”. In the case of discontinuation of the business operations in the future, a previously rescued allowance for losses would perish. According to the draft law, discontinuation of business operations is also deemed, e.g. in the case of the allocation of a different purpose or the inclusion of an additional business.

In principle, this draft law is welcomed. However there will be a need for discussion regarding the rather indefinite terms such as "the same business operations", "different purpose" or "additional business".