Court rules minimum profit taxation constitutional
Germany’s Federal Constitutional Court issued a decision on 23 July 2025 (case no. 2 BvL 19/14) in which it concluded that the domestic minimum taxation rules governing corporate loss carryforwards are constitutional and do not violate the equity principle in the constitution.
Legal background
Under German tax law, losses are first offset against other positive income from the same source in the year in which the losses are incurred and then, provided there are no offsetting restrictions, against positive income from other sources. If this is not possible, the losses may be carried over to other assessment periods—both back and forward—and deducted from the total income for those years. Losses are first carried back to the two immediately preceding years (as from the 2022 assessment period) but are capped. Any excess losses may then be carried forward indefinitely but they are limited to an amount above a base amount.
Specifically, under the minimum taxation rules, loss carryforwards are limited to EUR 1 million (i.e., the base amount) in any year. If the total income exceeds this base amount, the remaining losses may be offset only to the extent of up to 60% (70% for assessment periods 2024 to 2027) of the excess. The deduction of existing loss carryforwards is thus spread over time and, as a result of this technique, positive income that is subject to taxation remains even where there is a continuing loss carryforward.
Overview of the Case
The case concerned a corporation that was unable to use its loss carryforwards because the company was subject to insolvency proceedings involving its assets. The minimum taxation rules extended the period the company could use the losses, but because it was being liquidated, the company could not make future profits and therefore could no longer take the losses into account. The corporation appealed the assessment made by the German tax authorities, which did not take into account all of the losses incurred.
The Federal Fiscal Court (BFH) held that the basic concept of minimum profit taxation is compatible with Germany’s Basic Law, at least to the extent it merely results in a temporal extension of the consideration of losses, and losses are not definitively excluded from deduction. However, the situation is different if there is an internal factual connection between loss and profit or where profits and losses are generated by the same factors and minimum profit taxation has the effect of completely excluding the deduction of losses and triggering a form of taxation based on substance that is contrary to the ability to pay principle. The BFH therefore decided to refer the case to the Federal Constitutional Court to rule on whether the minimum tax provisions are compatible with the equity principle in the German constitution.
Decision of the Federal Constitutional Court
The Federal Constitutional Court ruled that the minimum taxation rules do not violate the constitution.
Insofar as the provisions under review limit the deduction of losses carried forward per tax period to 60% of the amount remaining after the EUR 1 million base amount is exceeded, they do result in unequal treatment of taxpayers, depending on their total income. However, where the total income exceeds the base amount, the provisions result in formal equal treatment of all corporate tax subjects, including those that do not continue to exist because their civil and tax law existence is terminated as a result of liquidation or insolvency but the resulting (unequal) treatment can be objectively justified.
This is because the limit on the amount of loss carryforwards under the basic concept of minimum profit taxation is supported by the objective reason of continuous and contemporary taxation as a “special fiscal purpose.” Minimum profit taxation is designed to ensure that the state has at least some access to current corporate profits by not allowing old losses to be offset without restriction. By ensuring a positive assessment basis, the government is able to “stabilize” tax revenue. However, the tax burden on individual taxpayers is not increased in terms of amount over time; instead, the assessment basis is simply spread over the assessment periods. As a result, particularly in the case of “perpetually viable” legal entities, losses from past tax periods can generally be carried forward over time.
The disadvantage resulting from the standardised minimum profit taxation rule, namely, that loss carryforwards cannot be fully utilised over time due to insufficient positive income and are ultimately lost without being used (“definitive effect”) in certain cases (e.g., insolvency), is proportionate to the primary objective of the rule, which is to ensure continuous, up-to-date taxation.
In addition, it should be noted that both the corporate income tax law and trade tax law contain special provisions for the taxation of corporate liquidations and general procedural law allows for the granting of equitable measures in individual cases.
