Federal Tax Court judgement: Limitation on losses in the case of an acquisition loss under section 4(6) of the Reorganization Tax Act confirmed

Gains under the Reorganization Tax Act

The Reorganization Tax Act recognizes various types of “gains”, with more or less intuitive designations: the “transfer gain”, the “takeover gain”, the “shareholding adjustment gain” [Beteiligungskorrekturgewinn] and the “consequential takeover gain” [Übernahmefolgegewinn]. Of these, only the takeover gain is defined in the Reorganization Tax Act (section 4(4) sentence 1; section 12(2) sentence 1), whereas the remaining “gains” are described in the Act solely by reference to their legal consequences. What they all have in common is that they arise on the “tax transfer date” [steuerlicher Übertragungsstichtag] within the meaning of section 2(1) sentence 1 (Circular of the Federal Ministry of Finance [Bundesministerium der Finanzen–BMF] of 2 Jan 2025, Federal Tax Gazette [Bundessteuerblatt–BStBl.] I 2025, p. 92, para. 02.04, in respect of the transfer gain and the takeover gain; para. 04.05, in respect of the shareholding adjustment gain; paras. 04.26 and 06.01, in respect of the consequential takeover gain). The same applies to the “fictitious dividend” [fiktive Dividende] under section 7, which is of importance in the case of reorganizations under sections 3 to 8 and section 18 (section 2(2); Circular of the Federal Ministry of Finance of 2 Jan 2025, Federal Tax Gazette I 2025, p. 92, para. 07.07).

All of this may of course also arise as a loss (on the “shareholding adjustment loss” see, for example, Federal Tax Court judgement of 30 Jul 2014, file ref. I R 58/12, Federal Tax Gazette II 2015, p. 199). A compulsory write-down in the case of aggregates of assets [Sachgesamtheiten] carrying hidden losses [stille Lasten], which could give rise to a “transfer loss”, has to date been rejected by the case law in the lower tax court (Hessian Tax Court [Finanzgericht Hessen] judgement of 24 Jun 2025, file ref. 7 K 1188/21; appeal pending before the Federal Tax Court, file ref. IX R 15/25). In doing so, they have taken a position contrary to that of the tax authorities, which expressly require such a write-down (Circular of the Federal Ministry of Finance of 2 Jan 2025, Federal Tax Gazette I 2025, p. 92, paras. 03.12, 11.06, 20.18 and 24.03). In view of the mandatory forfeiture of losses under the Reorganization Tax Act (section 4(2) sentence 2; section 12(3) second half-sentence), such a write-down as of the tax transfer date would in most cases entail definitive tax leakage in terms of income taxation.

However, particular issues arise with respect to the income tax treatment of a takeover loss. It arises “through the logic of accounting”, namely as the difference “between the value at which the assets transferred are to be taken over, less the costs of the transfer of assets, and the value of the shares in the transferring corporation” (section 4(4) sentence 1); the latter are compulsorily “drawn” into the business assets of the acquiring partnership as of the tax transfer date by operation of section 5(2) and (3). Only in rare - cross-border - cases is a revaluation required (section 4(4) sentence 2; Circular of the Federal Ministry of Finance of 2 Jan 2025, Federal Tax Gazette I 2025, p. 92, para. 04.29). In addition, the takeover loss must be reduced by the “fictitious dividend” pursuant to section 7 (section 4(5)).

Treatment of the takeover gain and the takeover loss under section 4(4) and following

For income tax purposes, the takeover loss is in every case deductible by the partners [Mitunternehmer] of the acquiring partnership only to the extent of 60 %, and at most in the amount of 60 % of the fictitious dividend under section 7 (section 4(6) sentence 4; held to be constitutional by Federal Tax Court judgement of 22 Oct 2015, file ref. IV R 37/13, Federal Tax Gazette II 2016, p. 919). Where a corporation is a partner in the receiving partnership, the loss is in every case disregarded (section 4(6) sentence 1).

In the cases covered by section 4(6) sentence 6, however, the loss is disregarded in its entirety even in the case of natural persons (“destruction of acquisition costs”), to the extent that the shares in the transferring corporation were acquired for consideration within the five years preceding the tax transfer date. The Federal Tax Court has applied this rule also to shares which the acquiring entity did not acquire until after the tax transfer date (application of section 5(1); Federal Tax Court judgement of 17 Aug 2023, file ref. III R 37/20, Federal Tax Gazette II 2024, p. 16). In the view of the Federal Tax Court, as a matter of procedural law “the question of the extent to which a takeover loss is deductible under section 4(6) is, as a starting point, necessarily to be determined in the separate determination procedure” [Feststellungsverfahren] (Federal Tax Court judgement of 10 Jul 2024, file ref. IV R 8/22, Federal Tax Gazette II 2026, p. 182, para. 33).

For trade tax purposes, section 7 sentence 1 of the Trade Tax Act [Gewerbesteuergesetz–GewStG] is then “overridden”, in that section 18(2) sentence 1 of the Reorganization Tax Act denies recognition of the takeover loss for trade tax purposes in every case and without further examination. The Federal Tax Court has consistently held that both section 4(6) and section 18(2) are constitutional (Federal Tax Court judgment of 5 Nov 2015, file ref. III R 13/13 and file ref. III R 12/13). For the purposes of trade tax, and hence of section 18(2) sentence 1, it most recently confirmed that case law expressly once again (Federal Tax Court judgement of 2 Oct 2025, file ref. IV R 14/25).

Confirmation of the established case law regarding section 4(6) 

On section 4(6), that is on the at least partial non-deductibility of the takeover loss - the Federal Tax Court has now ruled once again (file ref. IV R 3/23) and has confirmed its settled case law as well. The question whether the carry-over of book values had been correctly applied for in the case at issue had already been decided by the Federal Tax Court in the proceedings concerning the trade tax aspect (Federal Tax Court judgement of 2 Oct 2025, file ref. IV R 14/25), which it had severed by order of 9 Sep 2025 (see paras. 37 and following of that judgement).

The takeover loss also remains (partially) disregarded in those cases under section 4(6) in which the shares in the transferring corporation within the meaning of section 3 are not acquired until after the tax transfer date (section 2(1) sentence 1; section 5(1); to that extent in agreement with the Federal Tax Court judgement of 17 Aug 2023, file ref. III R 37/20, Federal Tax Gazette II 2024, p. 1). In the case of a “chain merger” [Kettenverschmelzung], this also applies to the acquisition of shares in a second-tier subsidiary by the subsidiary, where these are then merged upwards into their respective parent (para. 55).

The fundamental question of whether the significant restriction on the recognition of losses under section 4(6) is constitutional continues to be answered in the affirmative. With regard to the provision in section 4(6) sentence 6, second alternative, the Federal Tax Court continues to see “in particular an anti-abuse rationale,” even though the existence of abuse is not itself a prerequisite for the provision’s application. The provision is said to rest on the (strongly generalising) notion “that, where shares are acquired and a reorganization follows within five years, the ultimate purpose is not the creation of lasting corporate structures for economic reasons but rather the preparation of a restructuring designed to render the acquisition costs of the shares effective for tax purposes”.