Extraordinary Profits Created Under Restructurings According To German Law – To Be Exempt Or Not To Be Exempt, That Is The Question! Dr. Christian Herweg, Falk Loose and Jan Fürbaß

Author:Dr. Christian Herweg, Falk Loose and Jan Fürbaß
Profession:Hogan Lovells

Recently the German legislature passed a new law, exempting extraordinary profits created by the waiver of claims under restructurings from income tax liability. The amendment was necessary because the German Federal Tax Court had previously held the original administrative decree (which in a conceptually different manner avoided the tax burden on such profits) unlawful. This article gives a brief overview over the legislative history and the practical consequences of the amendment.


    1.1 Restructuring Decree

    In accordance with a decree issued by the German Federal Ministry of Finance in 2003 (the "Restructuring Decree"), it was a long-standing practice in the past that income taxes on extraordinary profits generated by the waiver of creditor claims were assessed under the unrestricted set-off of tax loss carry forwards, deferred and in the end fully waived.

    1.2 Court Decision nullifying the Decree in 2016

    In 2016 this common practice came to an abrupt end: The Grand Senate of the German Federal Tax Court (Bundesfinanzhof - BFH) held the decree unlawful for a breach of the principle of legality of administrative action, claiming there was no legal foundation for the administrative exemption in statutory law.

    The court found that only the legislature had the legal competence for passing a general waiver regarding taxes on profits resulting from restructurings. Furthermore the court concluded that a waiver of taxes by the tax authorities must always be based on an individual assessment of the individual case (for a more detailed description see Dörr/Herweg/Tschauner/Borries/Eggert, German Federal Tax Court nullifies the Restructuring Decree: http://ehoganlovells.com/rv/ff002e4da92dfe304e1dd9c40e4daef848f6829d/p=2447420).

    1.3 Legislative Countermeasures and EU State Aid Law

    In order to restore the former legal situation, in 2017 the German legislature finally passed a formal law (Article 2 (2) Gesetz gegen schädliche Steuerpraktiken im Zusammenhang mit Rechteüberlassungen (hereinafter GsSZR) ) amending section 3a German Income Tax Act and explicitly exempting extraordinary profits created under restructurings from income tax liability. In addition the same result was reached for trade tax liability through Article 4 (2) GsSZR, creating a new provision in section 7b German Trade Tax Act. According to Article 2 (4) GsSZR (amending section 52 German Income Tax Act) and Article 4 (3) GsSZR (amending section 36 German Trade Tax...

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