Stricter rules for loss offsetting: BFH confirms narrow interpretation

In its decision of January 16, 2025 (case no. IV R 28/23), the German Federal Fiscal Court (“BFH”) further clarified its case law on the loss offsetting restriction for limited partners in accordance with Art. 15a of the German Income Tax Act (EStG). The focus: the tax classification of off-balance sheet additions in accordance with Art. 7g (2) sentence 1 EStG and the civil law delimitation of shareholder accounts as equity or debt capital.

The specific case involved the question of whether a contribution booked to a new shareholder account and a profit-increasing addition in accordance with Art. 7g (2) sentence 1 EStG can be taken into account when determining the offsettable loss of a limited partner. The BFH denies this with clear reasons and once again emphasizes the decisive importance of the economic burden and the civil law structure.

No effect of the addition on the capital balance

The BFH makes it unmistakably clear that the off-balance sheet addition pursuant to Art. 7g (2) sentence 1 EStG does not affect a limited partner’s tax capital account. The additional amount is not an item in the commercial or tax balance sheet and therefore has no effect on the equity capitalization pursuant to Art. 15a EStG. Any increase in the tax result as a result of the off-balance sheet addition therefore has no effect on the offsetting of losses – just like the previous profit-reducing formation of the investment deduction in accordance with Art. 7g EStG. The BFH thus clarifies that only the tax balance sheet profit reduction from the deduction of an investment deduction from the acquisition and production costs of an asset has an effect on the capital accounts and thus the determination of the loss offsetting in accordance with Art. 15a EStG.

The decision follows the previous line of case law, including the decision from May 27, 2020 (XI R 12/18, Federal Tax Gazette II 2020, 779), and confirms the view of the tax authorities (BMF letter from June 15, 2022, Federal Tax Gazette I 2022, 945). The decisive factor remains that an off-balance sheet correction does not lead to an actual economic burden for the limited partner and therefore cannot contribute to an increase in the limited partner's ability to offset losses.

New capital account does not meet requirements for equity

The plaintiff's attempt to have the contribution made in 2018 included in the capital account for tax purposes was also unsuccessful. The contribution was posted to a newly created “capital account III” and formally allocated to equity. However, according to the content of the articles of association and shareholder resolution, the requirements for tax recognition as an equity account were not met.

The BFH essentially bases its assessment on two material criteria:

• Firstly, a tax capital account must participate in the company's losses. In the case in dispute, losses were recorded exclusively in a separate loss carryforward account. The new account was used exclusively to record positive annual results and contributions.
• Secondly, a withdrawal restriction is required. This was not the case either: The credit balances in the account could be transferred to and withdrawn from a loan account at any time without any restriction. There was no economic commitment.

The decision is in line with BFH case law on Art. 15a EStG, in particular the decision of November 10, 2022 (IV R 8/19, Federal Tax Gazette II 2023, 332), and once again emphasizes that the civil law structure and not the account designation is decisive.

Drafting implications for articles of association

This provides a clear framework for action in practice: Anyone wishing to include contributions in the capital account for tax purposes and safeguard the limited partners’ possibilities to offset losses must structure the contractual basis accordingly. The following is required:

• an explicit loss participation of the respective account,
• clear restrictions on the availability of funds,
• as well as a clear and documented admissibility of voluntary contributions, ideally by shareholder resolution in advance of the contribution.

If these requirements are not met, even economically substantial contributions can remain ineffective with regard to loss offsetting in accordance with Art. 15a EStG.

Consequences for limited partners and articles of association

The ruling clarifies what is often overlooked in practice: It is not the accounting entry, but the substance under civil law that determines whether a shareholder account is recognized as equity within the meaning of Art. 15a EStG.

Companies using flexible contribution models should critically review existing provisions in their articles of association. Substantial loss offsetting requires actual equity commitment – mere designations are not sufficient. With regard to the addition pursuant to Art. 7g (2) sentence 1 EStG, the BFH clarifies that off-balance sheet corrections in the context of the determination of profits for tax purposes do not lead to any actual economic burden on a limited partner and have no influence on the capital accounts or the offsetting of losses pursuant to Art. 15a EStG.

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