Federal Fiscal Court judgement on section 8c of the Corporation Tax Act (KStG) – loss carry-backs possible despite a change of control

Initial situation

The subject of the judgement was the acquisition in October 2018 of shares in a GmbH by another GmbH (the plaintiff), by which it became the sole shareholder. This transfer of shares led to a change of control and thereby to a detrimental acquisition as defined by section 8c(1) sentence 1 of the Corporation Tax Act (KStG), which led to tax losses being forfeited. The GmbH was then retrospectively merged into the shareholder as of 30 September 2018 (an upstream merger).

By the end of September 2018 the GmbH had realised a loss. For the prior year 2017 a positive taxable income in excess of the loss had already been assessed. The tax authorities classified the GmbH’s losses as not being deductableand did not establish any remaining loss. The plaintiff argued, however, that section 8c(1) sentence 1 of the Corporation Tax Act (KStG) does not lay down whether a loss carry-back is excluded and that the purpose of the provision – to prevent “loss trafficking” – is not affected by a carry-back. Cologne Fiscal Court found in favour of the plaintiff (judgement of 08/12/2022, 13 K 198/20). The tax authorities then appealed against this judgement.

Background

When shareholders change, leading to a change of control, loss carry-forwards from previous years as well as losses from the current year up to the date of the acquisition are forfeited under section 8c (1) of the Corporation Income Tax Act (KStG). In the tax authorities’ view this should also apply to loss carry-backs (Federal Ministry of Finance (BMF) circular of 28/11/2017, paras. 2 and 31 sentence 2).

• However, there are some exceptions to this forfeiture as follows, section 8c(1) sentence 5 KStG (the group clause)
• section 8c(1a) KStG (the hidden reserves clause)
• section 8d KStG (loss carry-forward connected to going concern) 

But in the case at hand, none of these exceptions was relevant.

Section 8c of the Corporation Icome Tax Act (KStG) only restricts the utilisation of losses with future profits – carrying back losses remains possible
The Federal Fiscal Court (BFH) dismissed the tax authorities’ appeal as unfounded. Current losses incurred up to the point of a detrimental acquisition may also be carried back to previous years. Section 8c of the Corporation Icome Tax Act (KStG) does not apply to loss carry-backs.

The Federal Fiscal Court (BFH) further clarified that:

The purpose of section 8c is to prevent new shareholders from utilizing existing losses – not to restrict those who originally incurred the losses from deducting them.
When a loss is carried back, it is allocated to prior periods, not to the period following the detrimental acquisition.
The wording of the Act (“until the detrimental acquisition”) does not require losses to be determined at year-end.

In Summary, the Federal Fiscal Court (BFH) confirmed that losses incurred during the fiscal year prior to a change of control can still be carried back despite the restrictions under Section 8c.

Section 8c of the Corporation Tax Act and group taxation for income tax
The Federal Fiscal Court (BFH) is aligning with current case law. Recently, the Düsseldorf Fiscal Court (09/12/2024, 6 K 1772/20 K, G, F) ruled that, in the presence of a tax group, losses incurred by the group during the fiscal year may first be offset against the controlling company’s profits – The provisions of Section 8c then apply only subsequently. 

Practical notes on planned transfers of interests

Prior to any acquisition of interest or restructuring that results in a change of control, companies should ensure the following steps are taken:

• Review Loss Positions: Determine whether any tax losses have been incurred up to the date of the change of control and confirm that these losses are properly documented
• Document the Acquisition Date: Accurately establish and record the date of acquisition or restructuring, as this is critical for compliance and assessment purposes.
• Assess Existing Tax Notices: For assessment notices already issued where a loss carry-back was denied under Section 8c of the German Corporation Income Tax Act (KStG), evaluate potential avenues for appeal.

We would be pleased to assist you with these matters.

Whether section 8c of the Corporation Tax Act (KStG) is constitutional remains unclear
The constitutionality of Section 8cis still under review by the Federal Constitutional Court (file ref. 2 BvL 19/17). The criticism of it is particularly directed at the very broad elimination of losses it includes, which does not distinguish between proper and improper tax planning. Companies should keep relevant assessments open for administrative proceedings.

Current advisory news in brief

Restructuring gains in separate business assets tax-free
The Federal Fiscal Court (judgement of 21/08/2025, IV R 23/23) decided that section 3a of the Income Tax Act (EStG) also applies to restructuring gains – income arising from waivers of tax liabilities due to restructuring-provided the restructuring aims at preserving the entire co-entrepreneurship.Maintaining thorough documentation is essential. 

Continuing to use carrying values when changing legal form to an asset-management partnership
The Hesse Fiscal Court (judgement of 24/06/2025, 7 K 1188/21) disagreed with the tax authorities, holding that when a corporation converts into assets-managing partnership, a tax-neutral transfer at carrying amounts is permissible even if those carrying amounts exceed fair market values due to hidden liabilities. An appeal is currently pending before the Federal Fiscal Court (IX R 15/25).