Federal Fiscal Court judgement: Loss offsetting for commercial animal breeding (section 15(4) Income Tax Act)

The loss schedule of section 15(4) sentences 1 and 2 of the Income Tax Act 

Under section 15(4) sentence 1 of the Income Tax Act, losses from commercial animal breeding or husbandry may not be offset against other trading or business income or against income of other kinds.  Deduction under section 10d of the Income Tax Act is likewise excluded. However, under 10d of that Act they do reduce the profits that the taxpayer earned or earns in the immediately preceding financial year and in the following years from commercial animal breeding or husbandry; section 10d(4) of the Income Tax Act applies accordingly (section 15(4) sentence 2 Income Tax Act). What arises is a closed offsetting sphere, which is sealed off in terms of matters (only income of the same kind) and persons (only the same taxpayer), but which, in terms of time, remains open in an unrestricted way until the death of the taxpayer.  For trade tax purposes, by contrast, these loss offsetting spheres are not replicated (R 7.1 (3) sentence 1 no. 4 Trade Tax Guidelines [Gewerbesteuer-Richtlinien–GewStR]; e.g. Federal Fiscal Court judgement of 8 Nov 2000, I R 10/98, Federal Tax Gazette. II 2001, 349, II.3.).

This rule was inserted into the Income Tax Act by the Second Tax Amendment Act 1971 [Zweites Steueränderungsgesetz 1971] as section 2a and shortly afterwards moved without change to section 15. Its purpose has remained the same ever since: traditional agricultural animal breeding and husbandry tied to farming, in which losses cannot usually be offset due to a lack of substantial non-agricultural income, is to be protected against competition from industrially operated animal production – historically, against tax shelter companies (e.g. Federal Fiscal Court judgement of 1 Feb 1990, IV R 45/89, Federal Tax Gazette II 1991, 625). Sentences 1 and 2 of section 15(4) therefore do not serve any revenue-raising purpose. Rather, they are intended to influence taxpayer behaviour – which is crucial to justifying it under the right to equal treatment.

The provision requires that the animal breeding or husbandry is commercial, which is usually only the case where the livestock unit limits of section 13(1) no. 1 sentence 2 of the Income Tax Act are exceeded. The Federal Fiscal Court construes the term restrictively in line with that purpose and measures this by whether there is agricultural land in use (judgement of 4 Nov 2021, VI R 26/19). What is crucial in practice is therefore the area of land available and who the animals are attributed to. The fact that, in the case in dispute, they were kept at a bed-and-breakfast establishment does not prevent them from being attributed to the party bearing the economic risk (Federal Fiscal Court judgement of 13 Sep 2022, XI R 33/20, Federal Tax Gazette II 2023, 578).  This decision also shows the force behind the schedule: section 15(4) sentence 1 of the Income Tax Act may take precedence over separate attribution of income under a tax group (sections 14 and following of the Corporation Tax Act [Körperschaftsteuergesetz–KStG]).

Procedurally speaking, a distinction must be drawn. Whether, and in what amount, income from commercial animal breeding or husbandry is included in the business income of a partnership is decided in the “separate and uniform determination procedure” (section 180(1) sentence 1 no. 2 (a) of the Fiscal Code [Abgabenordnung–AO]). The legal consequence of this (rejection of offsetting against other forms of income) is, however, only decided when the partner’s income tax is assessed (e.g. Federal Fiscal Court judgement of 28 Apr 2016, IV R 20/13, Federal Tax Gazette II 2016, 739, para. 8).  Added to this is the separate determination of the remaining loss carryforward under section 10d(4) of the Income Tax Act. Those wishing to defend themselves need to contest the assessment notice (section 351(2) Fiscal Code; section 42 of the Rules of the Fiscal Courts [Finanzgerichtsordnung–FGO]). In the case in dispute, the appeal was only against the income tax assessment notice.

Sentences 1 and 2 of section 15(4) of the Income Tax Act are in this respect merely the oldest representative of a whole family of loss schedules: sections 2a, 15(4) sentence 3 (business forwards, inserted by the Tax Relief Acts 1999/2000/2002 [Steuerentlastungsgesetz 1999/2000/2002–StEntlG]), 15(4) sentences 6 to 8 (atypical dormant equity holdings held by corporations in other corporations), 15a and 15b, 20(6), 22 no. 3 sentence 4, and 23(3) sentence 7. The legislator itself has demonstrated that such restrictions are certainly not without any alternative. For example, in the Annual Tax Act 2024 [Jahressteuergesetz 2024–JStG 2024] it repealed the restrictions on loss offsetting of section 20(6) sentences 5 and 6 for forward transactions and bad debts in all open cases, without replacing them, after the Federal Fiscal Court had expressed serious doubts as to their constitutionality (Federal Fiscal Court judgement of 7 Jun 2024, VIII B 113/23, Federal Tax Gazette II 2024, p. 637).

I. Permanent loss and individual taxation

The claimant was a limited partner in a limited partnership [Kommanditgesellschaft] whose business was deemed to be commercial animal breeding and husbandry as the result of exceeding the thresholds of section 13(1) no. 1 sentence 2 of the Income Tax Act. In 2020, the year in dispute, neither the partnership nor the claimant still kept any animals. For personal reasons, the claimant did not consider himself able to take up this kind of work in future. The tax office determined that there was a remaining loss carryforward from commercial animal breeding and husbandry. The action, which sought to offset this against the remaining positive income of the jointly assessed spouses, was dismissed by Lower Saxony Fiscal Court (judgement of 23 Oct 2024, 4 K 15/24).

In the absence of positive income of the same kind in the year in dispute, offsetting was ruled out (para. 13). The chamber also rejected interpretation contrary to the wording of the provision.  This can only be considered in exceptional cases, where literal application would lead to an absurd result not intended by the legislature (para. 15, with reference to Federal Fiscal Court judgement of 16 Jul 2025 I R 20/22, Federal Tax Gazette II 2026, 178). Here, the wording and the purpose coincide. Cases such as this one are precisely the target of the provision (para. 16 and following).

In constitutional terms, the sixth chamber of the Federal Fiscal Court measured the unequal treatment of taxpayers with unrestricted offsettable business losses solely against the prohibition of arbitrariness (para. 20, referring to Federal Constitutional Court judgement of 23 Jul 2025, 2 BvL 19/14, paras. 93 and following; on section 15b of the Income Tax Act see Federal Fiscal Court judgement of 21 Nov 2024, IV R 6/22, Federal Tax Gazette II 2025, p. 283, paras. 51 and following), while at the same time confirming that the provision to influence taxpayer behaviour is suitable, necessary and proportionate (para. 22). To the objection that, in view of the structural change in food production, the restriction may well fail to meet its purpose of influencing taxpayer behaviour the chamber countered that influencing taxpayer behaviour is never more than a means to come closer to a goal. Concerning the question of suitability, the court stated that it is immaterial whether there was actually any influencing effect (para. 23 and following referring to Federal Fiscal Court judgement of 1 Jul 2020, XI R 20/18, Federal Tax Gazette II 2021, 296.)

On permanent loss, the chamber denied at the outset that there was any final burden, the point of reference being not the limited partnership but the claimant as the subject to whom his income is attributed (section 2(1) of the Income Tax Act; Federal Fiscal Court judgement of 17 Dec 2007, GrS 2/04, Federal Tax Gazette II 2008, 608). For 2021, the limited partnership was determined as having ongoing partnership-level profit [Gesamthandsgewinn] from commercial animal breeding and husbandry and this was attributed to the claimant (paras. 27 and following). The chamber held only as an alternative that a forfeiture of losses would also have to be accepted.  It continued that such a forfeiture is not directly inherent in section 15(4) and section 10d, but is an indirect consequence of individual taxation, the limit of which is the death of the taxpayer (most recently, including on trade tax Federal Fiscal Court judgement of 10 Jun 2026, IV R 14/24). Art. 3(1) of the Basic Law [Grundgesetz–GG] does not guarantee either a “core area” of net income taxation or an absolute minimum degree of loss offsetting, and the deduction potential embodied in loss carryforwards is not a “proprietary legal position” as defined by Art. 14(1) of the Basic Law (paras. 30 and following, referring to 2 BvL 19/14, paras. 99, 106 and 115 and following).

Conclusions for loss schedules and advisory

The decision follows a line which largely bars constitutional challenges to restrictions on loss-offsetting. Following the Federal Constitutional Court ruling on minimum profit taxation (23 Jul 2025, 2 BvL 19/14), the first chamber concluded its referral proceedings accordingly (Federal Fiscal Court judgement of 15 Apr 2026, I R 21/25 (I R 36/18), on application during winding up). The sixth chamber had now applied these standards to the oldest schedule of the Income Tax Act. For sections 2a, 15a and 15b, 20(6) and 22 no. 3, the position should therefore be that constitutional challenges will have scarcely any prospect of success.

What remains as a fallback is equitable relief [Billigkeit]. The first chamber held in its judgement of 15 Apr 2026, I R 20/25 (I R 59/12), that where permanent loss arises as a result of balance-sheet effects from reversals, action under section 163 of the Fiscal Code should be given serious consideration. This can only be applied to section 15(4) to a limited extent: blocking the use of losses is not the unintended side effect of a method to stretch them over time but the intended content of a provision to influence taxpayer behaviour. A legal consequence deliberately ordered or accepted by the legislature will not, however, tolerate any measure of equitable relief (cf. Federal Fiscal Court judgement of 21 Sep 2016, I R 65/14). Requests made under section 163 of the Fiscal Code will therefore only have any prospect of success in unusual, particular situations.

Tax advice can therefore focus on the stage before – on classification (livestock units under section 13(1) no. 1 sentence 2 of the Income Tax Act, available land area, attribution of animals) and in determination, in which the “whether” of the schedule is decided (e.g. Federal Fiscal Court judgement of 14 Sep 1989, IV R 88/88, Federal Tax Gazette II 1990, 152). Once the loss has been finally determined as being from commercial animal breeding or husbandry, all that remains is to establish that positive income of the same kind has been earned – including as a sole proprietor or from other holdings (para. 29). Finally, the limit in terms of time must be borne in mind: the offsetting sphere is specific to person and ends on death. Transferring the loss to heirs is ruled out (Federal Fiscal Court judgement of 17 Dec 2007, GrS 2/04, Federal Tax Gazette II 2008, 608), as the tenth chamber recently confirmed for deductions under section 10f (Federal Fiscal Court judgement of 25 Mar 2026, X R 23/24), just as it had previously done for section 2a (Federal Fiscal Court judgement of 23 Oct 2019, I R 23/17, Federal Tax Gazette II 2021, 138). Where succession is planned, existing loss carryforwards must therefore be used during the taxpayer’s lifetime. It may be necessary to induce such use by building up sources of profit of the same kind in a targeted way.