Subsequent contributions to loss carryforward under section 15a of the Income Tax Act

Loss utilization for income tax purposes   

Losses for income tax purposes are, in principle, taken into account by way of loss offsetting - horizontally, within the same categories of income - and vertically - between different categories of income - and are thereby recognized in the same tax assessment period (section 2(3) of the Income Tax Act). Losses remaining after this offsetting are then treated by way of loss deduction (section 10d of the Income Tax Act): ex officio, they are carried back up to EUR 1,000,000, although following the amendments to section 10d(1) of the Income Tax Act in recent years, the carryback now covers two assessment periods. Upon application, the carryback may also be waived entirely (section 10d(1) sentence 6 of the Income Tax Act). 

The remaining losses are carried forward (section 10d(2) of the Income Tax Act). Under the constitutionally permissible (Federal Constitutional Court judgement of 23 Jul 2025, file ref. 2 BvL 19/14) minimum taxation, a base amount of EUR 1,000,000 is granted. In addition, losses may be deducted in an amount of 70 percent of the total amount of income exceeding EUR 1,000,000. For the trade tax, pursuant to section 10a sentence 1 and 2 of the Trade Tax Act [Gewerbesteuergesetz–GewStG], only a carryforward is permitted, with the percentage for the minimum taxation applicable there being 60 percent. 

However, there are exceptions to this system - the “scheduling” of losses runs throughout income tax law. Provisions such as section 20(6) of the Income Tax Act or section 23(3) sentences 7 and 8 of the Income Tax Act “lock” losses into such a schedule. As a result, these losses can no longer be offset vertically and are also no longer deductible; instead, they may be offset only against future income of the same type. From a constitutional perspective, a “stretching” and “schedularization” of losses is not objectionable (Federal Constitutional Court judgement of 22 Jul 1991, file ref. 1 BvR 313/88), whereas a complete exclusion is (Federal Constitutional Court judgement of 30 Sep 1998, file ref. 2 BvR 1818-91). This system is taken to the extreme in section 2a of the Income Tax Act, which addresses losses related to third countries (outside the EU/EEA) that may be offset “only against positive income of the same type and from the same country” (section 2a(1) sentence 1 of the Income Tax Act).

The legislature has established a particularly strict framework under section 15a of the Income Tax Act for the losses of limited partners. In particular, a limited partner in a partnership may claim such losses only to a limited extent under this provision: “The purpose of section 15a of the Income Tax Act is to grant a limited partner tax loss offset and deduction only to the extent that he is economically burdened by the loss” (Federal Fiscal Court judgement of 1 Mar 2018, file ref. IV R 16/15, Federal Tax Gazette [Bundessteuerblatt] II 2018, p. 527, para. 21). Furthermore, they may only be offset against future profits from the same investment, though in that case without restrictions imposed by the “minimum taxation” [Mindestbesteuerung] rule.

Narrow schedule under section 15a of the Income Tax Act

The limited partner is not the only one affected by the restrictions regarding offsetting and deduction of section 15a of the Income Tax Act: By virtue of section 15a(5) of the Income Tax Act, the legislature has brought numerous other cases within the scope of application, not least atypical silent partnerships [atypisch stille Gesellschaften], section 15a(5) no. 1 of the Income Tax Act (even the typical silent partnership [typisch stille Gesellschaft]) is covered by section 20(1) no. 4 sentence 2 of the Income Tax Act), partners in a civil law association [Gesellschaft bürgerlichen Rechts (GbR)] under special circumstances, section 15a(5) no. 2 of the Income Tax Act, and also foreign partnerships, section 15a(5) no. 3 of the Income Tax Act. In addition, the law provides for further cases of application, such as asset-managing partnerships that generate income from renting and leasing (section 21(1) sentence 2 of the Income Tax Act; e.g., Federal Fiscal Court judgement of 2 Sep 2014, file ref. IX R 52/13). 

In practice, a particular difficulty in applying section 15a of the Income Tax Act arises in connection with the treatment of “subsequent contributions” (section 15a(1a) of the Income Tax Act). Under current law, these do not result in the subsequent offsetting or deductibility of an existing offsetable loss, nor do they result in the offsetting or deductibility of the limited partner’s share of the loss in a future fiscal year, to the extent that the loss creates or increases a negative capital account for the limited partner. 

The provision was introduced by the Annual Tax Act 2009 [Jahressteuergesetz 2009] and first applied to contributions made after 24 December 2008. “Timely contributions” (contributions made during the year in which the loss arose) therefore result in the possibility of offsetting and deducting losses. Subsequent contributions made in a given year, however, cannot convert existing offsettable losses from previous years or losses from future fiscal years into offsettable losses, provided that the losses result in a negative capital account or increase an existing negative capital account. 

Constitutional permissibility of section 15a(1a) of the Income Tax Act

Section 15a(1a) of the Income Tax Act was a response to the Federal Fiscal Court’s case law on “subsequent contributions”: Prior to the statutory provision in the 2009 Annual Tax Act, the Federal Fiscal Court had ruled that contributions made to offset a negative capital account and not consumed by offsettable losses in the fiscal year of the contribution result in the recognition of an adjustment item [Ausgleichsposten], with the further consequence that losses from subsequent fiscal years are to be classified as offsettable until this item is utilized, even if this (once again) results in a negative capital account or increases it (Federal Fiscal Court judgement of 14 Oct 2003, file ref. VIII R 32/01, Federal Tax Gazette II 2004, p. 359, under II.3.). 

However, section 15a(1a) of the Income Tax Act as amended by the 2009 Annual Tax Act has superseded this case law. The adjustment item, whose “technical details” (para. 54) were not easily comprehended, was thus replaced by a statutory provision. The Federal Fiscal Court bases its reasoning in the constitutional assessment on this simplification of income taxation: measured against the equality principle set out in Article 3(1) of the German Constitution [Grundgesetz], what might appear to be an objectively unjustified unequal treatment, such as in comparison with “time‑congruent” contributions (i.e. contributions made in the year in which the loss is incurred), can be justified.