Minimum Taxation: Federal Fiscal Court Strengthens Equitable Measures in Cases of Permanent Loss Absorption

In its ruling of April 15, 2026 (Case No. I R 20/25, formerly I R 59/12), the Federal Fiscal Court (BFH) clarified important principles regarding the relationship between statutory minimum taxation and equity measures under Section 163 of the German Fiscal Code (AO).  The decision pertains in particular to cases in which existing loss carryforwards cannot be fully utilized due to statutory minimum taxation and are subsequently lost permanently. After the Federal Constitutional Court (BVerfG) ruled in 2025 that the minimum taxation provisions were constitutional, the BFH has applied these requirements to the case at hand.

The Federal Fiscal Court (BFH) first confirms that the regulations on minimum taxation for corporate income tax payers that prepare financial statements do not raise any constitutional objections. In principle, this also applies even if the application of minimum taxation results in loss carryforwards becoming permanently ineligible for use.

At the same time, however, the BFH clarifies that if such a definitive effect is based on a reversal effect under financial statement tax law, equitable relief measures under § 163 of the German Fiscal Code (AO) must be seriously considered. Consequently, the equitable relief review takes on considerable practical significance, particularly in cases of exceptional hardship.

Summary of the Judgment
The case concerned the taxation of a limited liability company (GmbH) for which insolvency proceedings had been initiated in 2005. The company had initially written off a receivable in the amount of approximately 44.2 million euros in full in its 2004 financial statements. After the receivable was later confirmed by a court, the write-off was reversed in 2006. The resulting reversal of the write-off contributed to a substantial net income for the year.

For the settlement period, the tax office took into account the existing loss carryforwards within the framework of the statutory minimum taxation. Consequently, a portion of the losses could not be offset against the profits realized. The plaintiff challenged the corresponding tax assessment notices and, in the alternative, requested a different tax assessment on grounds of equity pursuant to § 163 of the German Fiscal Code (AO). Both the objection proceedings and the subsequent lawsuit were unsuccessful. After the insolvency proceedings were concluded and the company was dissolved, the remaining loss carryforwards could no longer be utilized, meaning that a definitive effect had occurred in this respect.

Citing the Federal Constitutional Court’s decision of July 23, 2025—2 BvL 19/14—the Federal Fiscal Court confirmed the constitutionality of the minimum tax even in cases where its application results in losses no longer being available to reduce profits. With regard to the requested equity measure under § 163 of the German Fiscal Code (AO), however, the appeal was partially successful. The tax office must now rule on the grounds for equity asserted under § 163 AO. In doing so, particular consideration must be given to the extent to which the profits that cannot be fully offset against loss carryforwards due to the minimum taxation are attributable to accounting reversals.

Key Points of the Ruling
Taking into account the decision of the Federal Constitutional Court, the Federal Fiscal Court confirms that the statutory provisions on minimum taxation for corporate income tax payers that prepare financial statements are not unconstitutional. This applies even if, in a specific case, their application results in existing losses no longer being available to reduce profits.

In the context of the fairness review under Section 163 of the German Fiscal Code (AO), the Federal Fiscal Court (BFH) also clarifies that the mere definitive forfeiture of loss carryforwards is generally insufficient to establish that the application of the minimum tax is objectively unfair. Such unfairness can generally be considered only to the extent that the profits not offset against loss carryforwards are based on accounting reversal effects. In this case, the minimum taxation may generally be considered objectively unfair.

In the case at hand, the BFH considered it possible that an accounting reversal effect existed, at least in the amount of the write-off of the receivable in 2004 and the subsequent write-back in 2006.  Although this cannot be taken into account in the context of the tax assessment, it must be considered in the context of the equity decision. In the BFH’s view, any positive equity decision under § 163 AO is likely to be considered only for the tax period in which the profit arising from a reversal effect under balance sheet tax law is taken into account, and to the extent that the minimum taxation in that tax period prevents the full offset of this profit against loss carryforwards.

In addition, the Federal Fiscal Court (BFH) addresses the procedural requirements for an equity decision. If a request for equity under § 163 of the German Fiscal Code (AO) is filed during the tax assessment proceedings, the decision on this request must generally be combined with the tax assessment. In the case at hand, however, the plaintiff had filed the request for equity for the first time during the objection proceedings. Since the equity decision under § 163 AO is a discretionary decision, it could not be decided for the first time in the objection decision, as this would otherwise deprive the taxpayer of a level of review. The tax office must now rule on the grounds for equity asserted under § 163 AO.

Practical Relevance
The ruling is of particular practical significance for corporations with substantial carryforward losses. It makes it clear that the minimum tax generally applies even when carryforward losses can no longer be utilized. The definitive loss of carryforward losses alone is generally not sufficient to establish that the minimum tax is substantively unfair.

However, an equity review under Section 163 of the German Fiscal Code (AO) may be of particular importance if the profits subject to the minimum tax are based on a balance sheet reversal effect. Such a situation may arise, in particular, when a balance sheet item initially recognized as reducing profit is subsequently reversed through profit or loss in a later tax period. In the case at hand, this was the case with the write-off of a receivable and its subsequent write-back.

For tax practice, it is therefore advisable, in the event of an impending permanent loss, to examine in particular whether

• whether the unusable loss carryforwards are based on an accounting transaction that resulted in an offsetting profit in a subsequent period,

• to what extent the minimum tax specifically prevents the offsetting of this profit against the existing loss carryforwards, and

• at what point in time an equitable relief measure under § 163 AO is requested and what procedural consequences result from this.

The decision thus underscores the importance of carefully examining the causes behind the accumulation of loss carryforwards and subsequent increases in profits. For a decision based on equity, it is not solely the eventual elimination of the loss that is decisive; rather, the decisive factor may be whether—and to what extent—the profits subject to the minimum tax are based on a reversal effect in the financial statements.

Fazit
The Federal Fiscal Court (BFH) confirms that the minimum taxation rule generally applies even in cases where loss carryforwards are ultimately forfeited at a later date. There is no general exception for so-called “definitive effects.”
At the same time, the ruling opens up an important avenue for cases of exceptional hardship: If the “definitive effect” arises in connection with a reversal effect under balance sheet tax law, an equity measure under Section 163 of the German Fiscal Code (AO) must be seriously considered.

For companies with substantial loss carryforwards, therefore, the amount of the remaining losses should not be the sole consideration. It is also crucial to consider how these losses arose, which subsequent profits correspond to them, and whether the minimum tax prevents their full offset.

Particularly in cases of insolvency, liquidation, and similar termination situations, an early analysis of how the losses arose and of possible reversal effects in the financial statements may therefore be advisable. If such interrelationships are identified, it should be examined whether an equity measure under Section 163 of the German Fiscal Code (AO) can be applied for and at what point in time it is procedurally advisable to file the application.

Author: Katharina Eggert (Senior Tax Consultant)