Germany has issued draft guidance to replace prior advice on the corporate tax loss limitation rules. The current guidance was issued in 2008 and although there have not been any changes to the basic provisions in this area the new guidance aims to update the guidance for developments that have occurred since the original guidance was issued.

The rules in Germany provide that losses carried forward and losses that a company does not use may be partially forfeited in certain defined circumstances. This may happen if within a period of five years, more than 25% of the share capital passes into the possession of an acquirer or a “group of acquirers.” The whole loss is forfeited if more than 50% of the   transferred to the acquirers.

The new guidance covers the situations where there are mid-year changes in ownership; where there is a group exemption provision; and where there are hidden reserves. Where there is a change of ownership, the guidance indicates that the profits for the year should be allocated according to economic criteria to the time before and the time after the change of ownership.

Under the group exemption provision, there is no change of ownership the losses are therefore not forfeited if the same person held directly or indirectly 100% of the shares in the acquired and acquiring company. The guidance indicates that the transferring entity is the entity holding shares in the loss making company before the transfer of shares, and the acquiring entity is the entity holding shares in the loss making company after the transfer. There must be a shareholding relationship between the person, the transferring entity and the acquiring entity.

Under the provision in respect of hidden reserves no tax losses would be forfeited if the losses do not exceed the taxable hidden reserves of the domestic business assets of the corporation.