In a recently published decision of 1 February 2012 (I R 34/11), the Federal Financial Court (Bundesfinanzhof) ruled on the question whether foreign extraordinary losses have to be taken into account fully or only partially in view of the exemption-with-progression provision.
The Federal Financial Court confirmed the decision of 18 March 2011 (4 K 3477/09 E) of the Financial Court of Münster (Finanzgericht Münster) and held that foreign losses from the sale or closure of a business have to be taken into account fully in view of the exemption-with-progression provision. The domestic law provision, according to which "extraordinary income" is only taken into account with one-fifth does not apply to losses. In fact, positive income is only factored in with one fifth to avoid undue hardship within the application of the progressive tax rates, but this ratio cannot be applied to negative income. Thus, the Federal Financial Court dismissed the tax authority's appeal against the lower Court's decision and ruled in favour of the taxpayer.
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