Order of 23 July 2025 - 2 BvL 19/14
Minimum taxation
In an order published today, the Second Senate of the Federal Constitutional Court held that the statutory provisions on so-called minimum taxation (Mindestgewinnbesteuerung) in the context of the corporation tax and trade tax are constitutional insofar as they affect entities subject to the corporation tax within the meaning of § 1(1) no. 1 through 3 of the Corporation Tax Act (Körperschaftsteuergesetz – KStG) or companies within the meaning of § 2(2) first sentence of the Trade Tax Act (Gewerbsteuergesetz – GewStG).
The specific judicial review proceedings concern the question of whether the limitation on the deduction of loss carryforwards to a percentage amount imposed by the provisions under review is compatible with Art. 3(1) of the Basic Law (Grundgesetz – GG). The subject of the referral is a particular constellation in which what the Federal Fiscal Court (Bundesfinanzhof) describes as an ‘inverse accounting effect’ led to an increased amount of corporation tax loss carryforwards and trade tax loss carryforwards that the corporation was subsequently unable to use as deductions, as insolvency proceedings were commenced against its holdings.
The Senate has held that the minimum taxation rules are compatible with Art. 3(1) of the Basic Law. A violation of the applicable standards for arbitrariness is not present.
Facts of the case:
The provisions under review – applicable since the 2004 assessment or reporting period – govern the deduction of losses in tax periods following the foregoing tax period in which the losses accrued.
In the version of the corporation tax law relevant to these proceedings, loss carryforwards are not restricted in terms of time, but their deduction is restricted in amount. Specifically, the deduction of loss carryforwards up to a total amount of income (Gesamtbetrag der Einkünfte) of EUR 1 million (the so-called base amount) is possible. If the total income exceeds this base amount, then a deduction of loss carryforwards is only permitted with regard to 60 percent of the income in excess of the base amount. The deduction of existing loss carryforwards is thus spread out over time. As a result of this ‘spreading technique’, there remains, despite the existence of additional loss carryforwards, a positive income which is subject to taxation. This results in ‘minimum taxation’. A corresponding rule with regard to the reduction of deficits applies in the context of the trade tax.
In a report dated 15 September 2011, the working group ‘Offsetting of Losses and Group Taxation’ of the Federal Ministry of Finance (Bundesministerium der Finanzen) published the results of an evaluation of the German rules on the offsetting of losses, in particular loss carryforwards and minimum taxation.
The Federal Fiscal Court seeks a decision from the Federal Constitutional Court as to whether the provisions under review violate Art. 3(1) of the Basic Law.
The referring court is of the opinion that minimum taxation, at least regarding its ‘fundamental concept’, that is, the spreading of loss carryforwards over time, is constitutional. Nevertheless, the Federal Fiscal Court is also convinced that the provisions in these proceedings violate the ‘core’ ability to equalise losses if – as in the underlying proceedings – there is an internal connection between the losses and profits, or they rely on the same cause, and minimum taxation has the effect of completely ruling out the deduction of losses and effectively acts as an improper taxation of capital. The Federal Fiscal Court noted that in the underlying case, the expenditure and the return arose due to the same legal ground and were in corresponding amounts. It noted that the returns appeared to be a delayed act of reversal (actus contrarius) of the expenditure. It further found that ‘inverse accounting effects’ that often arise in connection with taxing the dissolution of corporations do not result in either an inflow of liquidity or an increase in the earnings capacity that would allow taxation.
Key considerations of the Senate:
The provisions referred for review do not violate constitutional requirements.
In this assessment, it must be determined whether, beyond cases in which a ‘definitive effect’ (i.e. a permanent lapse in loss carryforwards) in conjunction with an ‘inverse accounting effect’ occurs such as in the case referred by the Federal Fiscal Court, the ‘fundamental concept’ of the provisions on minimum taxation, which is simply to spread loss carryforwards over time, is compatible with the Constitution.
A. The provisions referred for review are compatible with the general guarantee of the right to equality (Art.-Article 3(1) of the Basic Law).
I. To the extent that the provisions under review limit the deduction of loss carryforwards per tax year to 60 percent of the total amount of income in excess of the base amount of EUR 1 million, they result in an unequal treatment of taxpayers depending upon the level of the total amount of income for corporation tax purposes or the relevant trading profits. In the case of a total amount of income in excess of the base amount, the provisions under review nevertheless result in formally equal treatment of all entities subject to corporation tax or trade enterprises, and thus also those taxpayers that are no longer going concerns but instead whose existence under civil and tax law has ended due to liquidation or insolvency. The question of whether this constitutes equal treatment of situations that are not equal can remain open here, as such lack of differentiation would be justified in any case.
II. The (un)equal treatment resulting from the provisions under review must be reviewed on the basis of the standard of arbitrariness. The criteria developed in the case-law of the Federal Constitutional Court do not lead to a more restrictive constitutional standard of justification, which might entail a stricter review of proportionality.
The unequal treatment arising both from the so called ‘fundamental concept’ of the rules as well as the formal equal treatment in the particular constellation of a ‘definitive effect’ resulting after the introduction of an ‘inverse accounting effect’ is not arbitrary, but is justified by objective reasons.
1. a) The justification of unequal treatment resulting from the limitation of the deduction of loss carryforwards according to the ‘fundamental concept’ of minimum taxation is supported by the objective ground of continuous and timely taxation as a special fiscal purpose. Minimum taxation is designed to allow the state a certain ability to tax current profits, in that old losses cannot be carried forward on an unlimited basis. Ensuring a positive tax base allows the legislator to keep tax revenue ‘stable’.
The purpose served by the provisions under review goes beyond the purely fiscal purpose of generating revenue for the state or increasing the amount of revenue. The primary aim of minimum taxation is to make available a positive tax base and thereby increase tax revenue despite existing losses carried over from past tax periods. Over the course of time, the total tax burden of individual taxpayers in terms of amount is not increased, instead, the assessment basis is distributed differently over the assessment periods. It is not ascertainable that the legislator’s assumption that spreading loss carryforwards will ‘permanently ensure continuous tax revenue’ is evidently erroneous. In this respect, the results of the evaluation as conducted by the working group ‘Offsetting of Losses and Group Taxation’ indicates that in tax years 2004 through 2008, minimum taxation led to (temporarily) higher and therefore stable tax revenue in the case of certain entities subject to the corporation tax that had high levels of loss carryforwards.
b) The ‘fundamental concept’ of minimum taxation also satisfies the constitutional requirements for typification.
aa) First, the legislator’s assumption – particularly in the case of ‘eternally viable’ legal entities – that losses from past tax periods can in principle be carried forward over time, is tenable. Likewise, the correlation with ‘large’ enterprises expressed in the law through its establishment of a base amount of loss carryforwards of EUR 1 million (the so-called medium enterprise component) does not fall outside of the legislator’s margin of appreciation and leeway to design; it also does not – in view of the goal of stability pursued by continuous and timely taxation – adopt an atypical case as a reference point. Nor is the chosen level of the statutory parameter (i.e. base amount combined with a percentage limitation on deductions) evidently flawed. Furthermore, the legislator may base the selection and design of the typifying elements (such as the amount) on the aspects of the greatest possible practicability and simplicity of the provisions as a secondary legislative purpose. It cannot be ruled out completely that the provisions under review are in fact ‘easy to apply’ in practice and that the fixed base amount contributes to simplified application by not capturing small or medium enterprises.
bb) The disadvantage resulting from the typification in the minimum taxation rules, whereby loss carryforwards cannot be fully deducted due to a lack of positive income and in some cases can lapse unused (the ‘definitive effect’), has a tenable connection to the primary goal of continuous and timely taxation pursued by the rules under review.
It is true that the tax paying entity bears the risk that it may not be in business a sufficiently long enough time, or not earn continuous profits over such time period, in order to be able to deduct its existing losses. However, such general risk is not unique to the provisions at issue and is hardly different from the risk of doing business generally. Moreover, to the extent that the provisions under review – as a consequence of the spreading of loss carryforwards over time – increase economic ‘loss in value’ through the lapse of loss carryforwards as a result of the ‘definitive effect’, the legislator has not exceeded the limits of its authority to use typification, in light of the legislative aim pursued. The provisions on minimum taxation do not themselves provide for a lapse in loss carryforwards as a legal consequence, instead, this results indirectly from other provisions or legal principles.
2. The formal equal treatment in the particular constellation of the proceedings referred by the Federal Fiscal Court of a permanent lapse in loss carryforwards (‘definitive effect’) resulting after the occurrence of an ‘inverse accounting effect’ does not exceed the legislator’s authority to use typification.
With respect to those special cases identified by the referring court, the legislator, in using typification, was not constitutionally obligated to enact a hardship clause that would alleviate cases of a ‘definitive effect’ after the occurrence of an ‘inverse accounting effect’ and thereby privilege such cases.
a) It is not ascertainable that the legislator would have been able to easily avoid the type of hardship that arises in these atypical cases by means of enacting alternative constituent elements. The concept of deducting loss carryforwards based on the total amount of income is not designed to equalise specific business transactions, but instead as a deduction of aggregated losses (carried forward) against the positive income of the current tax period. It is precisely this ‘causal neutrality’ of loss carryforwards, which remains unaffected by the minimum taxation, that demonstrates that the particular constellation of the underlying proceedings cannot be easily solved through legislation and therefore proves to be not easily avoidable.
b) The advantages of the typified design of minimum taxation are not disproportionate to the associated hardships in individual cases that result from the formal equal treatment of entities subject to the corporation tax and trade enterprises for which the occurrence of an ‘inverse accounting effect’ results in a (partial) lapse of loss carryforwards due to the cessation of their tax obligations.
In this regard, the following aspects must be considered: First, minimum taxation does not itself create a lapse in loss carryforwards. Further, both corporation tax law and trade tax law, which follows corporation tax law, have special provisions relating to taxation in connection with the liquidation of corporations and, finally, general procedural law allows for equitable measures to be granted. It is – considering the aforementioned aspects – not ascertainable that the specific constellation at issue in these proceedings affects more than a proportionally small number of taxpayers or that the extent of the lack of differentiation is considerable.
In conducting the review for evident errors which is applicable here, it is not apparent that the hardship occurring as a result of the typified equal treatment in the constellation in the underlying proceedings affects more than a proportionally small number of entities subject to the corporation tax or companies or that the (qualitative) effect is more than an inconsiderable amount. It also must be considered that even during the period of time in which the ‘definitive effect’ occurred, the deduction of losses in the amount of 60 percent of the total amount of income or the relevant trading profits in excess of EUR 1 million was still possible. The general risk of not being able to fully deduct loss carryforwards only occurs – even in the special case of the underlying proceedings – with regard to that portion of losses not deducted (and spread over time) due to minimum taxation.
B. The provisions under review also do not violate the guarantee of private property (Art. 14(1) of the Basic Law).