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Germany Tax: Financial restructuring privilege under change-in-ownership rules suspended

The German Ministry of Finance (BMF) issued guidance on 30 April 2022 in which it states that relief from the change in ownership rule for ailing companies (i.e. the financial restructuring privilege) will be suspended while the European Commission investigates the compatibility of the rule with EU state aid provisions. The relief is also suspended in cases where a binding ruling had been granted on the effects and applicability of the financial restructuring privilege. (The Commission announced on 24 February 2022 that it has opened a formal investigation into the restructuring exception on the grounds that it might confer a selective advantage on certain undertakings that cannot be justified because, while both ailing and healthy companies could be loss making, only ailing companies are allowed to retain loss carryforwards after a harmful share transfer.)

Tax assessments that were issued based on the application of the financial restructuring privilege generally remain valid for the time being. However, should the European Commission conclude that the financial restructuring privilege constitutes illegal state aid, any aid / tax advantage that has been granted would have to be recovered from the taxpayers. Taxpayers that have benefitted from the financial restructuring privilege cannot rely on being in good faith at the time the advantage was granted.

The financial restructuring privilege allows certain ailing German companies to retain net operating loss and interest carryforwards in situations where a financially healthy company would have forfeited its loss carryforwards and/or interest carryforwards after a substantial change in shareholders. The financial restructuring privilege was introduced in July 2009, with retroactive effect for harmful share transfers taking place as from 1 January 2008, and although the measure was due to expire on 31 December 2009, it was made permanent by the Law to Accelerate Economic Growth.

The European Commission's decisions in state aid cases are political and hard to predict, so it is difficult to speculate on the outcome of the investigation. The European Commission's investigations only relate to the financial restructuring privilege and should not affect the other exceptions enacted as from 1 January 2022 for intragroup restructurings or for companies with built-in gains.

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