BFH finds rules governing taxation of shares to be partially unconstitutional

Losses from shares can only be offset against profits from the sale of shares. The Bundesfinanzhof (BFH) – Germany’s Federal Fiscal Court – has ruled that this is unconstitutional and asked the Bundesverfassungsgericht – Germany’s Federal Constitutional Court – to weigh in (Az.: VIII R 11/18).

The fact that losses from share trading can, to date, only be offset against profits from the sale of shares is a source of frustration for shareholders, it not being possible to offset the losses against income from capital assets. We at the commercial law firm MTR Rechtsanwälte note, however, that shareholders may find hope in a recent ruling of the Bundesfinanzhof that points to the possibility of change.

In a judgment from November 17, 2020, the BFH made it clear that it considers this aspect of the taxation of shares unconstitutional, and it consequently brought the case in question to the attention of the Bundesverfassungsgericht.

The backdrop to this case is the German Corporate Tax Reform Act of 2008 (Unternehmenssteuerreformgesetz), which set out a fundamentally new framework for the taxation of capital investments held as private assets for tax purposes. The Act provides for, among other things, an additional restriction on the ability to offset losses from the sale of shares: these cannot be offset against income from capital assets; only profits from the sale of shares can be used to offset the losses.

The case before the BFH concerned a married couple whose unfortunate record dealing with shares had resulted in the couple incurring losses of around 4,800 euros from the sale of shares. They subsequently sought to offset these losses against income (of just under 3,400 euros) from other investments. Yet neither the competent tax office nor the Finanzgericht Schleswig-Holstein – the Fiscal Court of Schleswig-Holstein – at first instance was supportive of this course of action.

However, the Bundesfinanzhof reached a different conclusion on appeal, ruling that the restriction on the ability to offset losses from shares amounts to an unconstitutional violation of the principle of equality. As such, the court held that taxpayers’ losses from the sale of shares are being treated differently for tax purposes than losses from the divestiture of other investments. Moreover, the BFH found that there is no justification for this discrimination.

Many investors may stand to benefit if the Bundesverfassungsgericht affirms the position taken by the BFH. They would subsequently be able to offset losses from the sale of shares against other income from capital assets, e.g. from investments in funds or from interest.

Lawyers with experience in the field of tax law can provide counsel.