Financial restructuring privilege under change-in-ownership rules suspended

The German Ministry of Finance (BMF) issued guidance on 30 April 2010 in which it states that relief from the change-in-ownership rule for ailing companies (i.e. the financial restructuring privilege) will be suspended while the European Commission investigates the compatibility of the rule with EU state aid provisions (see Deloitte Tax-News). The relief is also suspended in cases where a binding ruling had been granted on the effects and applicability of the financial restructuring privilege.

Tax assessments that were issued based on the application of the financial restructuring privilege generally remain valid for the time being. However, should the European Commission conclude that the financial restructuring privilege constitutes illegal state aid, any aid/tax advantage that has been granted would have to be recovered from the taxpayers. Taxpayers that have benefitted from the financial restructuring privilege cannot rely on being in good faith at the time the advantage was granted.

The financial restructuring privilege allows certain ailing German companies to retain net operating loss and interest carryforwards in situations where a financially healthy company would have forfeited its loss carryforwards and/or interest carryforwards after a substantial change in shareholders. The financial restructuring privilege was introduced in July 2009, with retroactive effect for harmful share transfers taking place as from 1 January 2008, and although the measure was due to expire on 31 December 2009, it was made permanent by the Law to Accelerate Economic Growth (see Deloitte Tax-News).

The European Commission’s decisions in state aid cases are political and hard to predict, so it is difficult to speculate on the outcome of the investigation. The European Commission’s investigations only relate to the financial restructuring privilege and should not affect the other exceptions enacted as from 1 January 2010 for intragroup restructurings or for companies with built-in gains.

If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.