Loss carry-forwards and late-payment interest in coronavirus-related tax audits

In the context of the pandemic, the German tax authorities had examined options for providing relief to businesses and, amongst other things, extended the rules on loss set-off and postponed the start of the interest accrual period for so-called late payment interest. This could be utilised in appropriate cases as part of ongoing tax audits.

The deduction of losses for corporation tax purposes is governed by the provisions of Section 10d of the Income Tax Act (EStG). The amount of a loss carry-forward is subject to a limit (the so-called minimum taxation rule) and is set out in the table below. There is no time limit on carry-forwards in Germany. Please note the different rules for corporation tax (KSt) and trade tax (GewSt).

See § 8(1) of the Corporation Tax Act (KStG) in conjunction with § 10d of the Income Tax Act (EStG) and § 10a of the Trade Tax Act (GewStG).

Loss carry-backs are only possible for corporation tax or income tax purposes, but not for trade tax purposes. Loss carry-backs are generally capped at 1 million euros and are limited to one year. However, exceptions have been introduced due to the coronavirus pandemic.

The following table sets out the rules governing the possible utilisation of losses for the tax years 2019 to 2024.

 

See Section 233a of the German Fiscal Code in conjunction with various Corona tax relief laws.

In the case of income increases assessed retrospectively, late payment interest is also payable on the tax payments due retrospectively. With effect from 1 January 2019, the German tax authorities have reduced the interest rate to 0.15 per cent per month (previously 0.5 per cent; see Section 238(1a) of the German Fiscal Code), which represents a long-overdue reduction in the interest rate and is very much to be welcomed. It should be noted, however, that the legislature has provided, as part of the Annual Tax Act 2026, for an increase in the interest rate to 0.3 per cent per month (3.6 per cent per annum) for interest periods commencing on or after 1 January 2027.

With regard to the start of the interest accrual period, the tax authorities have also introduced special provisions in connection with the challenges posed by the COVID-19 pandemic, which are outlined below.

 
See § Section 233a of the German Fiscal Code in conjunction with various Corona tax relief acts.

In transfer pricing cases, it is not uncommon for the outcome of a tax audit to be a set of facts that cannot be fully clarified, coupled with an agreement between the taxpayer and the tax authorities regarding an adjustment to income.

The de facto mutual agreement is an instrument recognised in case law and by the tax authorities, whereby the tax office and the taxpayer can agree on a specific set of facts where clarifying themwould be difficult or involve a disproportionate amount of effort. It is of particular practical importance in the context of tax audits, as it stems from the principles of proportionality and economic rationality (see also “Actual agreement on the facts underlying the tax assessment – application in cross-border cases“; BMF letter of 30 July 2008, amendments of 15 April 2019 and 23 June 2023).

Consequently, if an agreement is reached with the tax authority that the aforementioned solution is feasible, there may also be scope forallocate the loss across the tax years, so that the loss set-off and interest on arrears provisions, as outlined above, can be utilised.

Our KPMG transfer pricing experts are happy to answer any questions you may have.