Minimum taxation: the Federal Fiscal Court specifies equity under section 163 of the Fiscal Code

Minimum taxation and permanent effects according to Federal Constitutional Court decision 2 BvL 19/14

“Minimum taxation” limits the deduction of losses above the base amount of € 1 million to 70% (starting from 1 Jan 2028: 60%) of the excess amount of income (section 10d(2) sentence 1 Income Tax Act; correspondingly, section 8(1) sentence 1 Corporate Income Tax Act). Concerning trade tax, sentences 1 and 2 of section 10a of the Trade Tax Act [Gewerbesteuergesetz–GewStG] contain their own rules, which operate with a percentage of 60% above the base amount of € 1 million. The minimum taxation itself therefore does not cause loss carryforwards to be forfeited, but to be spread over time: The loss can usually only be deducted later so its economic value is reduced.

The marked differences between the corporate income tax system and the trade tax system as regards loss deductions also cause incongruities in the amount of the loss carryforwards (R 10a.1(1) sentences 4 and 5 of the Trade Tax Guidelines [Gewerbesteuer-Richtlinien–GewStR]). Trade tax does not include a carryback for losses, which is provided for in section 10d of the Income Tax Act as the first step of the deduction of losses, to be carried out ex officio, and which can only be prevented on request (section 10d(1) sentence 6 Income Tax Act, “in total” [“insgesamt”]). The assessment bases also differ as a result of the application of sections 7 to 9 of the Trade Tax Act. For example, income from partnerships gives rise to corporate income tax (section 15(1) sentence 1 no. 2 Income Tax Act), but for trade tax purposes, the partner does not generate trading income of his own (section 9 no. 2 sentence 1 Trade Tax Act Federal Fiscal Court, most recently judgement of 11 Dec 2025, III R 38/22). Section 10a sentence 12 of the Trade Tax Act also covers such divergences between corporate income tax loss carryforwards and trade tax shortfalls for the “autonomous application” of section 8d of the Corporate Income Tax Act.

If loss carryforwards remain unused when a company is wound up, this can lead to permanent loss, in which the minimum taxation no longer just covers loss deduction into the future but definitively prevents the losses from being used. For reorganisations, too, the inability to transfer loss carryforwards may also trigger such effects (sections 4(2) sentence 2, 12(3) second clause, 15(3), 18(1) sentence 2, 19(2), 23(5) of the Reorganisation Tax Act [Umwandlungssteuergesetz–UmwStG]). The case decided in Federal Fiscal Court judgement I R 20/25 concerned a GmbH (German limited liability company) being wound up in insolvency proceedings, whose corporate income tax for 2008 and basic trade tax amounts for 2006 to 2008 had been assessed applying minimum taxation. The first chamber of the Federal Fiscal Court had already suspended the proceedings in 2014 and referred the question of its constitutionality to the Federal Constitutional Court (judgement of 26 Feb 2014, I R 59/12, Federal Tax Gazette II 2014, p. 1016).

In its ruling on 23 July 2025 (2 BvL 19/14), the Federal Constitutional Court held that the rules on minimum taxation are not open to constitutional objection in the case of corporation tax subjects that prepare balance sheets, even where in individual cases case they lead to a definitive forfeiture of loss carryforwards The measure here was said to be the prohibition on arbitrary decision-making. It also stated that there is no constitutionally mandatory “core area” for loss offsetting.

But at the same time, the Federal Constitutional Court pointed out that the legislature was not required itself to mitigate the hardships of minimum taxation by way of a hardship clause in the statute, because sections 163 and 227 of the Fiscal Code open up the possibility of an equitable decision on a case-by-case basis (paras. 160 and following of the ruling of 23 Jul 2025, 2 BvL 19/14). Taking these requirements into account, the first chamber confirmed the application of minimum taxation in the case in dispute: Neither the amount of the profit determined for the corporate income tax assessment period (section 11(1) sentence 2 Corporate Income Tax Act) nor the one-off application of the base amount of € 1 million (Federal Fiscal Court judgement of 23 Jan 2013, I R 35/12, Federal Tax Gazette II 2013, p. 508) was erroneous. The chamber also confirmed the trade tax add-back of financing expenses under the previous version of section 8 no. 1 of the Trade Tax Act (years in dispute 2006 to 2008), because the loans taken out were not tied by a “use restriction” to particular sales of real estate.

Equitable relief under section 163 of the Fiscal Code in the case of balance-sheet effects from reversals

From a procedural perspective, the claimant first requested equitable relief in the objection proceedings against the assessment notices. To the extent that the Federal Fiscal Court ruled on this request, it set aside the lower court decision and the decision regarding the objection combining equitable relief with assessment is ruled out if the request is only made subsequently. Under section 367(2) of the Fiscal Code, a decision concerning an objection may not go beyond the original administrative act (referring to Federal Fiscal Court judgement of 11 Dec 2024, XI R 35/21). The tax office must therefore decide on requests for equitable relief separately.

In substantive terms, the chamber specified when objective inequity as defined by section 163 of the Fiscal Code may be considered. The definite forfeiting of loss carryforwards by itself, e.g. on the conclusion of insolvency proceedings, will not usually be sufficient (Federal Constitutional Court judgement of 23 Jul 2025, 2 BvL 19/14). Rather, what is decisive is whether the profits that can no longer be offset are based on a balance-sheet effect of a reversal or not. In the case in dispute, the GmbH had initially written down a receivable due from a contractual partner and had written it off in full in its 2004 financial statements. But after the receivable was confirmed in court, it wrote it back up to its nominal value in 2006, to around € 44.2 million. The first chamber had decided the balance-sheet questions raised by the case in separate proceedings (section 121 sentence 1 in conjunction with section 73(1) of the Code of Procedure for Fiscal Courts [Finanzgerichtsordnung–FGO]) (Federal Fiscal Court judgement of 26 Feb 2014, I R 12/14). It was precisely this interplay between a write-down and subsequent write-up that, in the chamber’s view, constituted the balance-sheet effect of a reversal, which, although it cannot be included in assessment, must necessarily be taken into account in deciding on equity.

As regards the amount of any equitable relief, the base amount of € 1 million and the profit attributable to the effect of the reversal are to be offset against loss carryforwards in precedence. Only the profit exceeding this amount is still subject to the 60 %/70 % limit. In addition, the tax office must take into account that the insolvency has now been concluded and the company has been deleted from the Commercial Register, so the permanent effect has ultimately materialised, provided that a subsequent distribution under section 203 of the Insolvency Code [Insolvenzordnung–InsO] is not considered.

Practical note: Request equitable relief early and specifically 

Two practical consequences follow from this decision.  First, requests for equitable relief under section 163 of the Fiscal Code should, if possible, already be made on assessment, so assessment and the decision on equity can be combined and no additional procedural step is required at the tax office.

Secondly, the decision shows that a permanent effect of minimum taxation alone does not usually justify equitable remission – what is called for is a specific analysis of whether the profits concerned are based on balance-sheet effects caused by a reversal, such as a write-up following an earlier write-down to going-concern value [Teilwertabschreibung], the discontinuation of a provision or similar events. Those facing permanent effects caused by minimum taxation in the course of liquidations, restructurings or reorganisations should systematically look for effects from reversals in the balance-sheet history of the assessment periods concerned and give these as the grounds for requesting equitable relief.