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Brussels, 26 January 2011

State aid: Commission finds German rule on carry forward of losses for fiscal purposes ("Sanierungsklausel") by ailing companies is incompatible under EU State aid rules

A so-called reorganisation clause, or "Sanierungsklausel", under German corporate tax law that enables an ailing company to offset losses in a given year against profits in future years despite changes in its shareholder structure amounts to State aid, the European Commission has decided on Wednesday. This is because the corporate tax law does not generally allow for losses to be offset when there has been a significant change in the ownership structure, giving a clear financial advantage to ailing firms and possibly their acquirers. The Commission orders Germany to recover any aid granted this way since the 1st of January 2008 as of when the clause came into forcee.

“The Sanierungsklausel is tantamount to a subsidy to companies difficulty as the State foregoes tax revenues that would otherwise be due by the companies concerned or their new owners. If a company is in trouble and the State considers its rescue is in the national interest, the support should be granted through the Rescue and Restructuring guidelines, which is the appropriate instrument to make sure that the distortions of competition are kept to a minimum," said Joaquín Almunia, Commission Vice-President in charge of competition policy.

In February 2010, the Commission opened an in-depth investigation (see IP/10/180) into the so-called "Sanierungsklausel" or reorganisation clause in the German corporate tax law (Körperschaftsteuergesetz). The clause allows companies that are illiquid or over-indebted to offset losses in a given year against taxes on profits in future years, a process known as the carry forward of losses. This is despite changes in the company's shareholding structure.

The clause departs from the general principle in the corporate tax law of Germany, among other countries, that prevents the carry forward of losses for fiscal purposes precisely when there has been a significant change in the shareholding structure of the company concerned. This is to prevent companies avoiding taxes by taking over failed companies for the sole purpose of using their fiscal carry-forward value.

The Sanierungsklausel was adopted in July 2009 with a retroactive effect from January 1st 2008. It was not notified to the Commission, which found out about it through the press. It was supposed to last only during the financial crisis but at the end of 2009 it was rendered permanent.

Having listened to third parties, as well as the German authorities, the Commission has concluded that the Sanierungsklausel favours ailing companies over financially-sound ones, which can also suffer losses in a given year, in particular during the crisis, but cannot offset them, if there has been a significant change in their shareholder structure. The clause therefore distorts competition in the single market. The German authorities' view that the clause was a mere new technical feature of the German tax system, and could therefore escape qualification as state aid, did not convince the Commission.

The Commission also assessed the compatibility of the Sanierungsklausel against the terms of the Temporary Framework for state aid to businesses during the crisis, the EU Rescue and Restructuring guidelines (see MEMO/04/172), of the Regional aid guidelines (see IP/05/1653), the Environmental Aid guidelines (MEMO/08/31) and, finally, of Article 107 (3) of the TFEU, that allows aid to support certain economic activities or sectors under certain conditions. The Commission concluded that the Sanierungsklausel did not comply with any of the requirements in those rules.

If a company has difficulties and the government decides to grant money towards its rescue and restructuring, this is possible but under individual notifications to the Commission, which needs to assess that the aid is limited to the strict minimum necessary to limit distortions of competition and that the company is viable in the medium term.

The Commission's decision in no way challenges the mechanism of carry forward of losses in the tax system which apply to all tax payers in a non discriminatory way.

Germany has two months to inform the Commission of the list of the beneficiaries and of the total amount of aid to be recovered.

The non-confidential version of the decision will be made available under the case number C 7/2010 (SA. 29150) in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

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