Why do Tax Loss Utilization regulations exist?
In Germany, companies can generally offset losses incurred in one fiscal year against profits in different fiscal years so that they can reduce their tax burden in profitable years. However, this loss deduction is not without limitations.
Loss utilization regulations impose limits but are fundamentally not intended to prevent the utilization of losses. Limiting loss utilization aims to extend the period over which losses can be deducted in other profitable years, thus achieving a steady flow of tax revenue from the state's perspective. Constitutionally, there are no concerns as long as the utilization of losses is not rendered impossible. Currently, the regulation is under scrutiny, which states that if more than 50% of the shares in a corporation with tax losses not yet utilized are transferred within five years, these losses are completely forfeit.
How Loss Utilization works
For corporations with their registered office and/or place of management in Germany, tax losses that have not yet been utilized may generally be carried back for corporate tax purposes up to a maximum amount. While a maximum amount of 10 million euros was stipulated for losses in the years 2020 to 2023, a maximum amount of 1 million euros will apply for losses from the year 2024 onwards. Since 2022, losses up to the respective maximum amount can be carried back not only to the previous year but also to the second preceding year. However, the company must decide whether to utilize the option of this loss carryback up to the amount of the unused loss or up to the respective maximum amount, or to renounce the loss carryback altogether. For the additional taxation of company profits with trade tax in Germany, no loss carryback is provided.
For trade tax and also corporate tax purposes, there is still the possibility of a loss carryforward for a corporation based in Germany. Thus, losses that have not yet been utilized are offset against profits of subsequent years until fully balanced. There are also restrictions here. Up to an amount of 1 million euros, the offsetting of carried-forward losses against profits is possible without limit. A remaining profit could previously be reduced by only up to 60% through losses carryforward. For the years 2024 to 2027, an offsetting of up to 70% of the remaining profit is possible – but only for corporate tax purposes. For trade tax purposes, the cap of 60% remains unchanged.
When it comes to a partnership in Germany, loss utilization for trade tax purposes follows the aforementioned regulations. For corporate tax or income tax purposes, depending on the legal form of the partners of the partnership, the profit and loss shares are allocated to each partner and can usually be offset similarly to the regulations for corporations.
How we support you
- We take into account the loss utilization regulations existing in Germany when choosing the legal form of your investment in Germany to ensure optimal loss utilization tailored to the individual case.
- We also take loss utilization aspects into account when making changes to the corporate structure or in the corporate group.
- To enable you to make optimal tax-related decisions, we keep you up to date with changes to loss utilization regulations. For example, timing shifts in the acquisition of fixed assets or the use of leasing options instead of purchases may prove beneficial for managing the emergence of corporate profits or losses.
