When a subsidiary is disbanded from the fiscal unity, fiscal unity losses can under circumstances be transferred (or sold) to the subsidiary to be disbanded. Due to restrictions on loss carry forward, passing along fiscal unity losses is not always wise.
A parent company can, upon request and under conditions, together with one or more subsidiaries be regarded as a fiscal unity for corporate income tax purposes. Losses incurred during the existence of the fiscal unity can be set off against taxable profits of the fiscal unity of the previous year(carry back) or of the six following years(carry forward) in accordance with the usual loss compensation rules.
If the losses arose before 2019, a carryforward period of nine years applies. After the demerger of a subsidiary, two categories of losses can be offset against the subsidiary's post-merger profits: pre-merger losses of that subsidiary and tax unity losses attributable to that subsidiary.
Conditions for transferring attributable losses
Fiscal unity losses caused by the subsidiary can only be transferred to the subsidiary upon request of the parent and the disjoined subsidiary. The legislator has not regulated exactly how the loss to be communicated should be determined. As a result, disputes may arise in practice regarding the determination of the attributable tax loss.
The commercial financial statements can be used as an aid in determining the loss to be transferred to the subsidiary. Based on case law, in total, no more losses can be included than the total tax loss that can be offset in the fiscal unity at the time of separation of the subsidiary. This often results in the extent of the loss to be carried forward only becoming clear (much) later.
It is not possible to partially transfer the fiscal unity losses attributable to the subsidiary to the disjoined subsidiary: it is all or nothing. Carried forward fiscal unity losses can no longer be offset against subsequent profits of the laggards. If fiscal unity losses are not transferred to a disassociated subsidiary, they remain with the parent company and can be offset there.
Restrictions on loss carry forwards
Carried forward losses can be offset against the subsidiary's subsequent profits through the carry forward scheme. Backward loss offset(carry back) of the losses carried forward is not possible. In accordance with the usual carry forward scheme, carry forward losses can be offset against taxable profits of the subsidiary for up to six years (for losses incurred before 2019, a carry back period of up to nine years applies).
If insufficient profits are realized by the disassociated subsidiary after disassociation, these temporal limitations may ensure that losses cannot be carried forward in time and will evaporate.
In addition to temporal limitations, restrictions may apply to the carry forward of losses carried forward if the interest in the disjoined subsidiary has changed for 30% or more (for example, if the shares of a subsidiary are entirely or partially disposed of). In such situations, the general rule is that carried-forward losses are not deductible against post-merger gains if the subsidiary is classified as an investment company.
Conclusion
In practice, the restrictions on the carry forward of losses may affect the choice of whether or not to include fiscal unity losses with the subsidiary to be disbanded. It is therefore advisable to pay sufficient attention to the points for attention outlined above in the case of the demerger of a subsidiary.
Because this is a matter of choice - and the losses can also be left behind - it also depends on the negotiating power of the parties and thus the effect on the share sale price, whether the losses must also be transferred.
