Loss deduction

Definition and legal basis:

The loss deduction is a tax law instrument that allows taxpayers to offset losses from one assessment period against profits from other periods. This principle is based on the idea of taxation according to economic performance and is intended to avoid an excessive tax burden in loss-making years. The legal basis for loss deduction can be found in the Income Tax Act (EStG), in particular in Section 10d EStG, and in the Corporation Tax Act (KStG) for corporations.

The loss deduction comprises two main components: the loss carry-back and the loss carry-forward. While the loss carry-back allows offsetting against profits from previous years, the loss carry-forward allows offsetting against future profits. These regulations apply to both income tax and corporation tax, although there are some specific differences.

Types and conditions of loss deduction:

1. loss carry-back (Section 10d (1) EStG):
– Allows losses to be offset against profits from the previous year
– Limited to 1 million euros (2 million euros for joint assessment)
– Can be excluded in whole or in part upon request

2. loss carryforward (Section 10d (2) EStG):
– Allows losses to be offset against profits from future years
– Possible for an unlimited period
– Subject to minimum taxation: losses can only be deducted without restriction up to EUR 1 million (or EUR 2 million in the case of joint assessment), beyond that only 60% of the total amount of income exceeding EUR 1 million can be deducted

Requirements for loss deduction:
– The losses must have been incurred in an assessment period
– The taxpayer must be identical (exceptions for conversions)
– The losses must have been determined in accordance with tax regulations

Special features and restrictions:

1. loss deduction for corporations:
– Subject to the provisions of Section 8c KStG (shell company purchase regulation)
– In the event of a change in ownership of more than 50% within 5 years, loss carryforwards may be completely lost
– Exceptions: Group clause, hidden reserves clause, reorganization clause

2. loss deduction for partnerships:
– losses can generally only be offset against profits from the same source of income
– restriction on loss offsetting for certain types of income (e.g. losses from commercial livestock farming)

3. minimum taxation:
– is intended to prevent full tax exemption of high income through the deduction of losses carried forward
– can lead to losses being offset over time

Practical significance and design options:

The loss deduction is of great practical importance for companies and private individuals:

For companies:
– Important instrument for smoothing tax payments over several periods
– Increase in liquidity in loss years through loss carry-back
– Strategic planning of investments and depreciation to optimize loss deduction

For private individuals:
– Possibility of offsetting losses from different types of income
– Particular relevance for investments and letting

Design options:
1. Choice between loss carry-back and carry-forward to optimize the tax burden
2. Use of special depreciation allowances for targeted loss generation
3. Structuring company takeovers to preserve loss carryforwards
4. Timing of profit realizations for the efficient use of loss carryforwards

Current developments and discussions:

The loss deduction is regularly the subject of legal and political discussions:

1. extension of the loss carry-back: The carry-back period was temporarily extended during the COVID-19 pandemic. There are discussions about a permanent extension.

2. reform of the shell company purchase regulation: The provisions of section 8c KStG have been criticized and in some cases declared unconstitutional by the Federal Constitutional Court.

3. international aspects: Increasing importance of cross-border loss offsetting in the context of EU case law.

4. digitalization: effects of digital business models on loss offsetting and possible adjustments to tax law.

5. sustainability aspects: Discussions on the role of loss deduction in promoting sustainable investments.

In summary, the loss deduction is an important instrument in tax law that takes into account the economic reality of companies and private individuals and enables fair taxation over several periods. The complex regulations require careful planning and structuring, but also offer opportunities for tax optimization. The future development of loss deduction will be significantly influenced by economic challenges, political decisions and the ongoing internationalization and digitalization of the economy.