Germany: Amended dual consolidated loss rule cannot be applied retroactively (lower tax court decision)

The Lower Tax Court of Düsseldorf held that the dual consolidated loss (DCL) rule cannot be applied retroactively.

Cannot be applied retroactively (lower tax court decision)

The Lower Tax Court of Düsseldorf held that the dual consolidated loss (DCL) rule, which was amended in 2013, cannot be applied retroactively. 


According to the German DCL rule, losses of a tax group parent or subsidiary may not be considered if they are (also) considered in a foreign jurisdiction in the taxation of the tax group parent, the tax group subsidiary, or another person.

The German DCL rule was amended in 2013 to reflect the revocation of the requirement of so-called double domestic nexus for controlled entities (subsidiaries)—pursuant to which a controlled entity must have its registered office and place of management in Germany. Since then, a controlled entity may have its management in Germany, while its domicile (registered office) can be in an EU or EEA country.

Due to the revocation of double domestic nexus for controlled entities, dual use of losses is now conceivable at the level of the controlled entity, for example because the company is included in group taxation in various countries. According to the explanatory memorandum to the amendment to the DCL rule, this is particularly the case if losses of a dual-resident controlled entity is offset against or deducted from positive income of a group parent in the context of taxation in the foreign jurisdiction.

The 2013 amendment required the application of the amended DCL rule to all cases still appealable, and thus retroactively for years prior to 2013. 


In the case at hand, the DCL rule was applied to disallow a 2010 loss of the taxpayer, a German limited liability company (GmbH) domiciled in Germany. The taxpayer's sole shareholder is Company A, domiciled in the United States. In the year in dispute, the taxpayer was the controlling entity of the German GmbH B (controlled entity). For U.S. tax purposes, the taxpayer was treated as a "disregarded entity" and thus was considered a permanent establishment of its sole shareholder for U.S. tax purposes. Both the positive and negative income of the taxpayer was determined according to U.S. tax principles and taken into account for the taxation of the sole shareholder in the United States. The taxpayer's income, which included an attributed loss of its controlled entity, was negative in the year in dispute and such loss was taken into account in the U.S. taxation of the group. As a result, the German tax authorities adjusted the profit for the domestic taxation of the taxpayer under the DCL rule by "adding back negative foreign income in the tax group."

The lower tax court held that the application of the amended DCL rule to all cases that are still appealable leads to an inadmissible retroactive application to the detriment of the taxpayer. In particular, the lower tax court concluded that the DCL rule does not apply to assessments that are still appealable for periods prior to 2013 of controlled entities that had their registered office and place of management in Germany. They were not recognized as controlled entities for the first time precisely because of the elimination of double domestic nexus requirement. These taxpayers therefore did not benefit from this statutory relief, which had however been cited by the legislator as a reason for the consequential amendment to the consideration of limited losses under the DCL rule.

The government has appealed to the Federal Tax Court.

Read a July 2022 report [PDF 336 KB] prepared by the KPMG member firm in Germany 


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