Loss forfeiture pursuant to Section 8c of the German Corporation Tax Act (KStG) and possible loss carryback – confirmation by the Federal Fiscal Court (BFH)

With its ruling I R 1/23 of July 16, 2025, the Federal Fiscal Court (BFH) provides clarity regarding the loss forfeiture under Section 8c of the German Corporation Tax Act (KStG) and a possible loss carryback.

But what was the issue?

A domestic corporation (transferring GmbH) generated taxable income of around €1,843,459 in the 2017 financial year. In 2018, as a result of a retroactive merger with a cut-off date of September 30, 2018, the company incurred a loss of €14,058, which it claimed in its 2018 corporate income tax return. Parallel to the merger, the subsequent acquiring company acquired all remaining shares in the transferring GmbH on October 17, 2018, thereby becoming the sole shareholder.

The competent tax office refused to carry back the loss from 2018 to 2017 on the grounds that there had been a harmful acquisition of shares and that loss offset was therefore excluded under Section 8c of the Corporation Tax Act (KStG). The Cologne Fiscal Court upheld the appeal. The Federal Fiscal Court (BFH) has now confirmed the decision in favor of the company.

Legal framework Section 8c KStG

According to Section 8c (1) sentence 1 KStG, the possibility of loss offset or loss utilization does not apply if more than 50% of the shares in a corporation are transferred to a purchaser within five years (“detrimental acquisition of shares”).

Objective: to prevent the abuse of old losses by new shareholders, so-called shell company purchases.

Carrying back and forward losses

Negative income and losses can generally be carried back to the previous year and the second assessment year preceding the assessment period, and carried forward to future years (Section 10d EStG, applicable analogously to corporations). Carrying back reduces the taxable income of the previous year. As of 2018, carrybacks were only possible to the previous year.

Conversion law/merger

In the present case, the law on conversion and mergers (Conversion Tax Act 2006 – UmwStG 2006) was also relevant, particularly with regard to the question of whether and how a retroactive merger affects the identity of the company.

Decision of the Federal Fiscal Court

The Federal Fiscal Court ruled that the loss incurred up to the date of the demise is eligible for carryback despite the share acquisition because the following conditions were met:

• The loss of €14,058 was incurred in the 2018 financial year prior to the detrimental acquisition of shares (share acquisition on October 17, 2018).

• The company that incurred the loss (the transferring GmbH) is the same company that sought the carryback – there was no change in the company's identity within the meaning of Section 8c KStG.

• Section 8c KStG aims to prevent a new company (or a company with a changed economic identity) from utilizing old losses. However, there was no such change in this case: the economic and legal identity remained unchanged.

• The retroactive merger also did not change the possibility of utilizing the losses for carryback. The conversion law did not preclude this.

The tax office's appeal was therefore rejected and the decision for 2017 was amended to take the loss carried back into account.

Significance for practice

This decision has important practical implications:

• The timing of the share acquisition in relation to the time when the loss arose is decisive: as long as the loss arose before the harmful acquisition of shares and the company remains the same, carryback may be possible.

• A mere change in shareholding does not automatically lead to the loss being forfeited under Section 8c of the German Corporation Tax Act (KStG); the decisive factor is whether the economic identity of the company is retained.

• In the context of mergers or transformations, it must also be carefully examined whether there has been a change in the identity of the company and from what point in time a majority shareholding was transferred.

Conclusion

With its ruling I R 1/23 of July 16, 2025, the Federal Fiscal Court (BFH) provides clarity: The carryback of a loss to the previous year is not automatically excluded if a detrimental change in shareholding occurs in the same financial year, provided that the loss arose before the acquisition and the company's identity is retained. For companies and their tax advisors, this represents an opportunity, but also the need to examine the circumstances closely.