Statement on the draft bill to update tax loss carry-forward rules
In early September a draft bill prepared by the Federal Ministry of Finance to update the tax loss carry-forward rules for corporations was made available to BIO Deutschland for comments. Among other things, the legislation corrects the consequences of the 2008 corporate tax reform that the association has criticised for a long time in the strongest of terms. The reform had tightened the shell company purchase rules in section 8c of the German Corporation Tax Act (KStG) and thus also the loss carry-forward rules. This led to a further worsening of the framework conditions for equity financing for innovative small and medium-sized enterprises (SMEs). BIO Deutschland has submitted a statement on the draft bill to the ministry in which it expressly welcomes the fact that the Federal Government seeks to address the longstanding problem concerning the tax loss carry-forward rules for corporations.
Up to now, the rule has been that if within five years more than 25 percent of a company’s shares were transferred to an acquirer or related parties, the not deducted or not compensated negative revenues (unused losses) that existed at that time will be proportionally, or in some cases completely, forfeited.
Research-based biotech companies in Germany, which are largely SMEs, often need access to equity financing in the form of venture capital. Biomedical research, particularly in a field like therapeutics development, has very high capital requirements. Rounds of financing by private investors commonly involve changes in the shareholder structure of biotech SMEs. In most cases, an ownership change occurs when more than 25 percent of shares changes hands. On the other hand, the companies post losses as a result of the high R&D costs, because many research-based biotech firms do not generate any revenues initially and their expenditures therefore exceed their income. Insofar as tax loss-carry-forwards are proportionally or completely forfeited through the ownership change, private investors must use part of the company’s financial substance, i.e. its equity capital, to pay the taxes that come due. This increases private investors’ entrepreneurial risk and makes it more difficult for young technology companies to attract the equity capital needed to finance development and growth.
As it currently stands, section 8c of the KStG severely limits the financing options available to biotech SMEs, putting them at a disadvantage vis-à-vis large corporations. By introducing a new section into the KStG (the new section 8d) it will now be possible to retain the losses forfeited under section 8c of the KStG, albeit within strict limits. One prerequisite is that same business must be maintained during the three years preceding the change in ownership or from the moment of formation if this is less than three years. BIO Deutschland supports the introduction of section 8d of the KStG; however, in the opinion of the association, it would be preferable to revise and update section 8c of the KStG. In addition, the financial substance may still be taxed in the event of ongoing losses should there be a peak in earnings as a result of out-licensing agreements.