The Federal Constitutional Court acknowledged the intention to prevent abusive practices. However, it considered the way the rule had been implemented was inappropriate and arbitrary. Allowing loss utilization for certain companies and not for others leads to the unequal treatment of taxpayers. Unequal treatment must be justified by objective reasons which relate to why and how taxpayers are treated differently.
The legislator had chosen a partial change in ownership of a corporate taxpayer to be the relevant objective reason to differentiate between corporate taxpayers that cannot utilize their carried forward losses while those without a change in ownership can continue to utilize their carried forward losses. This approach did not find the sympathy of the court.
The court argued that there could be many reasons why a change in ownership occurred, in particular with respect to minority shareholdings , as is the case with a partial transfer. These reasons “do not always relate to making the losses available for use by another company or the new shareholder”. If the standard transaction that triggers a differentiated treatment between taxpayers is not of itself a typical example of an abusive transaction, then it cannot be the basis of a general tax provision that treats all taxpayers undertaking such a transaction as abusive.
The judgement of the Federal Constitutional Court only covers the proportional forfeiture of carried forward losses on a partial transfer. The Court did not make any statement with regard to the complete forfeiture of losses if more than 50% of the shares are transferred. To that extent, the constitutional law implications remain unclear.
The decision also does not apply to the regime as it has operated since 2016. Because of the introduction of the “continued operations” exemption, a carried forward lossnow remains usable following a change of ownership where the operations of the company do not change, albeit this is still regarded as a harmful change in ownership for the purposes of the rules. For the exemption to apply, the company must have exclusively continued to run the same business operations for the three years immediately preceding the shareholder change. The Federal Constitutional Court held that the new exemption must be “separately considered”.