19.05.2015Shortening of shareholder chain does not trigger change-in-ownership rules
The local tax court of Düsseldorf has ruled that the change-in-ownership rules that result in a forfeiture of tax losses are not triggered where mergers of entities within the shareholder chain merely result in a shortening of the chain.
The local tax court of Düsseldorf ruled on February 9, 2015 that a shortening of the shareholder chain through a merger will not trigger the German change-in-ownership rules.
Under the change-in-ownership rules that were in effect at the time (i.e. before the intragroup restructuring exception was introduced on January 1, 2010), all tax loss carryforwards and current tax losses of a company were forfeited if there was a more than 50% direct or indirect change in shareholders; tax losses were forfeited on a pro rata basis if there was a shareholder change of more than 25% up to 50%. Before introduction of the intragroup restructuring exemption, no distinction was made between (direct/indirect) intragroup or third-party changes in shareholders, i.e. tax losses were forfeited in both cases.
The case before the tax court involved a German corporation (A-GmbH) that had tax loss carryforwards and was owned indirectly by a foreign corporation (B-SA). The shareholder chain between B-SA and A-GmbH was shortened by way of upstream and downstream mergers of several intermediary entities.
The German tax authorities disallowed the use of the tax loss carryforwards following the mergers on the grounds that the mergers led to an indirect change in ownership in A-GmbH.
The local tax court disagreed with the tax authorities, concluding that the change-in-ownership rules must be interpreted to mean that a mere shortening of the shareholder chain will not result in a forfeiture of tax losses. The principle underlying the change-in-ownership rules is that a company is deemed to (partially) lose its business identity if there is a more than 50% (25% respectively) change in its shareholders. However, where there is only a shortening of the shareholder chain, but the indirect shareholder remains unchanged, the identity of the company also remains unchanged and, thus, no tax loss forfeiture occurs.
The decision is in line with a 2011 decision of the Lower Tax Court of Berlin-Brandenburg in a similar case.
The tax authorities are expected to appeal the case to the Federal Tax Court, which will issue a final decision on the case.
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