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27 January 2011
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European Commission rules against the German
Restructuring Escape
The European Commission has decided, the so-called reorganisation, “Sanierungsklausel” under German corporate tax law to be incompatible State aid. The decision became public on Wednesday, 26 January. It came as no surprise.

Dr. Christoph von Wilcken
Attorney at law in Germany
Dr. Christoph von Wilcken
Dr. Christoph von Wilcken
The “Sanierungsklausel “ was first adopted in July 2009 with a retroactive effect from  1 January 2008. For the time being only a temporary instrument to overcome the aftermath of the financial crises, the German lawmaker lifted the time limitation already in December 2009. The Commission learned all about this from the newspapers. A formal procedure was launched by the Commission in subsequence in February 2010.

The “Sanierungsklausel” enables ailing companies to offset losses in a given year against profits in future years despite changes in its shareholder structure. Since German corporate tax law does not generally allow for losses to be offset when there has been a significant change in the shareholder structure, the Commission argues, a clear financial advantage is given to particular companies and possibly their acquirers.

It was the German lawmaker´s intention to prevent all types of trading with losses, when it limited the possibility to offset losses against profit in cases a significant change in the shareholder structure took place. The Tax Reform Act of 2008 in an attempt to simplify things and to increase tax revenues abolished the definition under which acquisition were regarded as an abuse of the opportunity to deduct losses carried forward and along the way also abolished the existing restructuring escape. If the Commission´s decision would result in an overhaul of the German Corporate Tax Code in respect to deduction of losses carried forward and changes of the ownership structure, it would be a good result.

As an immediate impact of the Commission´s decision the German tax authorities will have to collect any aid granted under the “Sanierungsklausel”. This will, however, only apply to cases before April 2010, when the Federal Ministry of Finance decided the “Sanierungsklausel” not to be applicable while being under scrutiny by the Commission. There is of course still the possibility that we will see a ruling by the Court of Justice in the matter. Not only the Federal Republic but any taxpayer concerned can appeal to the Court.

Dr. Christoph von Wilcken, Attorney at law in Germany

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