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Coronavirus - Flat-rate carryback for expected losses – Germany

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Retroactive reduction of advance tax payments for 2019 ...

Due to the coronavirus crisis, many taxpayers can expect their income to collapse considerably in 2020, leading to losses that can be offset against tax payments. Such losses can be offset against income in the current year or carried forward to subsequent years, but they can also be carried back to the previous year. If the individual income or corporate income tax for 2019 has not yet been determined, the taxpayer can carry the losses expected to be incurred in 2020 back to 2019 in a lump sum by applying for a lump-sum reduction of the advance payments for 2019 with immediate effect. This will help to reduce potential tax back-payments for 2019 without affecting liquidity.

The German Federal Ministry of Finance (BMF) summarised the requirements for this immediate Covid-19-measure in its letter dated 24 April 2020:

... by carrying back a flat-rate calculated loss from 2020

For the subsequent reduction of the prepayments for 2019 by claiming the flat-rate loss carry-back

| an application must be submitted in writing or electronically (e.g. via ELSTER) to the rele-vant tax office.

| All taxable persons directly and significantly negatively affected by the coronavirus crisis are eligible to request this. Such a case is assumed if the advance payments for 2020 have been reduced to EUR 0 and the taxpayer assures that he expects a not inconsidera-ble negative amount of income in 2020 due to the coronavirus crisis.

| The taxpayer is either subject to individual income tax and earns income from agricul-ture and forestry, business operations and self-employment as well as from leasing and letting - whereby it is not harmful if there are any other types of income - or corporate income tax and

| the tax for 2019 has not yet been assessed.

| The reduction of the advance payments can generally be made up to 15 months after the end of the tax year or even up to 23 months if the income is mainly generated from agri-culture and forestry.

Procedure for the flat-rate loss carryback

1. Determination of the flat-rate loss carryback

The flat-rate calculated loss carryback from 2020 amounts to 15% of the balance of the relevant profit income or income from rental and leasing from 2019, up to a maximum of EUR 1 million or EUR 2 million in the case of the joint assessment of income for couples.

2. Tax assessment 2019

If there is an increase in tax for 2019 triggering additional tax payments, these can be deferred on request for a limited period of one month after notification of the tax assessment, without additional charges; however, the amount of the tax deferral is limited to the proportion of the loss carryback in relation to the total additional tax payment. It is also assumed that at the time of filing the 2019 tax return, the taxpayer continues to expect a not insignificant loss for 2020. It should be noted that the tax deferral is subject to the assessment of the interest payments and the condition of revocation at the tax authorities' discretion. If the tax basis for 2020 has been assessed based on an estimate, the tax deferral can become really expensive, because in this case the tax office will have to set tax deferral interest rates of currently 6% p.a. retroactively.

3. Tax assessment 2020

If there is a loss carryback resulting for the tax year 2020, the deferred additional payment for 2019, which had been fixed until then, will not be required.

If it turns out that the loss in 2020 is not as high as expected and therefore no loss carryback to 2019 was possible, the deferred tax for 2019 must be paid one month after notification of the 2020 tax return.

If there is only a significantly lower loss carryback to 2019 and the tax reduction will therefore be lower than the deferred tax, the remaining tax must be paid within one month of the announce-ment of the corrected tax assessment for 2019.

Practical advice: So check who is tied (to the tax office) for longer ...

In principle, the immediate measure to increase liquidity in the short term is to be welcomed, as is the explicit extension to landlords. As with the previously announced coronavirus tax relief, the hurdles for granting the flat-rate reduction of tax prepayments for 2019 are not only high, but also subject to legal uncertainty and additional obligations to provide evidence:

In addition to the criterion of "direct involvement in the coronavirus crisis" (see our newsletters dated 31.03.2020 and 03.04.2020), which has already been required for other coronavirus tax relief measures, the term "not inconsiderably negative" involvement has now been added.

Admittedly, the BMF acknowledges that it is difficult to forecast and explain the losses in individual cases due to the uncertainties about the economic development in the current situation. Nevertheless, the taxpayer should "insure" - i.e. not just simply "make it plausible" - that he expects negative income when filing an application. Furthermore, he must not only document his economic situation well when applying for a reduction of advance payments for 2019, but also keep this in mind, at the latest by the time he submits his tax return for 2020.

In contrast to the previous announcements on the coronavirus tax relief, the BMF now clearly states that the tax office must set deferral interest at 6% p.a. in the event of non-compliance with the conditions.