BMF halts BFH ruling on loss offsetting

The German Federal Ministry of Finance (BMF) responded to the Federal Fiscal Court’s (BFH) decision of August 29, 2024 (Ref. V R 43/21) in a letter dated June 6, 2025, and issued a non-application decree. The uncertainty created by the 5th Senate regarding the requirements for loss offsetting has thus been eliminated by the tax authorities. 

Background on loss offsetting for public companies 

If a public company engages in one or more activities that are structurally permanently loss-making, this generally constitutes a constructive dividend to the funding corporation or shareholder in whose interest the activity is performed by the company. 

However, pursuant to Art. 8 (7) sentence 2 of the German Corporate Income Tax Act (KStG), the consequences of a constructive dividend do not apply to the extent the permanent loss-making business is maintained without cost-covering remuneration for reasons of transport, environmental, social, cultural, educational, or health care purposes. In these cases, the loss from these activities is available for loss offsetting purposes in accordance with Art. 10d of the German Income Tax Act (EStG). 

However, offsetting these permanent losses is only possible for corporations and commercial businesses (Betrieb gewerblicher Art) in accordance with the combination requirements of Art. 4 (6) sentence 1 KStG. Permanent loss-making businesses can only be aggregated with the results from other activities 

• if they are similar, 
• if, taking into account all actual circumstances, there is objectively a close mutual technical and economic interdependence of some significance between them, or 
• if they are undertakings serving to supply the population with water, gas, electricity, or heat, public transport, or port operations. 

This option allows public-law entities or their municipal companies to form a so-called municipal multi-utility structure, in which loss-making activities (e.g., public transport or swimming pools) are combined with other, more profitable activities (e.g., electricity, water, or gas supply), allowing the results to be offset for tax purposes. 

The public sector itself still has the option of combining the commercial business pursuant to Art. 4 (6) sentence 1 KStG (“may”); in the case of a corporation, however, according to the clear wording of Art. 8 (9) sentence 1 KStG (“shall”), the activities must be combined as far as possible into the so-called divisions in accordance with Art. 4 (6) sentence 1 KStG. 

BFH (5th Senate) decision of August 29, 2024: Consequences for loss offsetting 

In its decision of August 29, 2024, BFH decided that the requirements of Art. 4 (6) sentence 1 KStG must be met individually for each of the commercial businesses to be combined. As a result, for the purpose of combination, commercial businesses that have already been combined must be “split” back into their individual activities, and the combination requirements must then be checked for all of these activities. 

In this specific case, the ruling concerned the combination of a swimming pool operator and a water supply operator by means of a combined heat and power plant (CHP). The plaintiff municipality had – in accordance with previous administrative practice – combined the supply operations of the CHP and the water supply (Art. 4 (6) sentence 1 no. 1 KStG) and then further combined this combined commercial utility business with the outdoor swimming pool due to the close technical and economic interdependence (Art. 4 (6) sentence 1 no. 2 KStG). 

The competent tax office had rejected the combination of the swimming pool with the commercial utility business, arguing that the CHP plant was “oversized” and therefore lacked a close technical and economic link. The municipality filed a lawsuit against this decision.  

The Schleswig-Holstein Tax Court (Tax Court) upheld the complaint in its decision of June 17, 2021 (Ref. 1 K 115/17). In accordance with previous principles, the Tax Court conducted a two-stage review: In a first step, it reviewed the combination of supply activities into a combined commercial business; in a second step, it reviewed the further combination of the combined commercial business on the basis of a close economic and technical interdependence between one of the combined activities and the outdoor swimming pool, which, according to the courts and tax authorities’ previous opinion, is sufficient for further combination (so-called “Mitschlepptheorie” or “chain combination”). 

The Federal Fiscal Court overturned the decision on appeal by the tax office. Based on the wording, the system, and the legislative intent, the requirements for combination must be met individually by all commercial businesses that are to be combined. Accordingly, there must be close technical and economic interdependence not only between the baths and the CHP plant, but also between the baths and the water supply. 

Normally, these conditions will not be met, which in many cases would effectively lead to a split of the municipal multi-utility structure into the areas of swimming pools and energy supply on the one hand, and the areas of other utilities and transport on the other.  

Particularly in the case of corporations, this view would lead to considerable practical problems in light of the obligation to combine activities as far as possible. For example, it would be unclear whether an energy supply division that is closely intertwined with a swimming pool in technical and economic terms should be combined with the swimming pool division or with other similar supply activities or with a possible transport division. 

In its decisions of March 14, 2024 (Ref. V R 2/24 and V R 51/20), the 5th Senate has already indicated that it takes a view on the combination of divisions and, in particular, on the significance of Art. 8 (9) sentence 3 KStG that deviates from previous case law and administrative practice. 

BMF’s non-application decree 

The BMF will not apply the decision of August 29, 2024 beyond this individual case. The tax authorities are therefore adhering to the principles set out in the BMF letter of November 12, 2009 (Federal Tax Gazette I 2009, 1303). 

Accordingly, from the tax authorities’ perspective, the conditions for combination set out in Art. 4 (6) sentence 1 only need to be met between the commercial businesses to be combined. If one of these commercial businesses has already been combined before, only the commercial business created by the combination needs to be checked to ensure that the conditions are met. 

The BMF thus continues to adhere to the so-called “characteristic feature theory,” according to which, when combining self-combined commercial businesses, it is important to determine which of the activities combined in the commercial business give the overall structure its characteristic feature. 

BMF’s non-application decree creates legal certainty despite restrictive BFH ruling 

The non-application decree issued by the BMF is to be welcomed. The ruling of the 5th Senate has cast considerable uncertainty on loss offsetting through combination in accordance with Art. 4 (6) sentence 1 KStG. The 5th Senate takes a very restrictive view in this area, which leads to significant application problems for the corporations concerned under Art. 8 (9) KStG. 

According to the provisions of Art. 8 (9) sentence 1 KStG, they are obliged to combine their business activities into divisions to the greatest extent possible. According to the 5th Senate’s case law, such combination into divisions is possible to a much lesser extent than according to the tax authorities, the literature, and probably also the other BFH senates’ opinion. 

With the non-application decree, the BMF is continuing the previous administrative opinion, which had been formed not least by the case law of the Federal Fiscal Court’s Grand Senate and had not previously been challenged by the tax courts, thereby removing, at least from an administrative point of view, the uncertainties created by the 5th Senate. However, it is still to be expected that the 5th Senate will continue its line of case law in future cases. 

It is therefore to be hoped that the federal government will fulfill the promise set out in the coalition agreement to strengthen municipal multi-utility structures and secure public services, and that it will make adjustments to the legal provisions within the scope of its legal options.