Simple vs. extended deduction for owned real estate
In the case of a simple deduction for owned real estate, 1.2 per cent of the assessed value of the real estate that belongs to business assets and is not exempt from real estate tax can be deducted from the company’s profit. This therefore constitutes trade tax relief. Other conditions generally do not have to be fulfilled.
In the case of an extended deduction for owned real estate, companies that exclusively manage and use their own real estate can make a deduction of that part of their profits that is attributable to the management and use of that very same real estate. This thus effectively constitutes a trade tax exemption. It is not detrimental, from a tax point of view, if capital assets are managed and used alongside the real estate assets. The extended deduction will only be granted upon application and under narrowly defined conditions.
Selected BFH rulings from 2019
The BFH, in its ruling from 11.4.2019 (case reference: III R 36/15) had to decide if a real estate management GmbH (a German limited company) that, besides a hotel building, had also let equipment such as, e.g., cold storage rooms or a beer cellar cooler system, should be allowed to make an extended deduction for owned real estate. In its ruling, the BFH adopted the opinion of the tax office that had refused to allow the extended deduction for owned real estate. The extended deduction for owned real estate has been based on the premise that the real estate conforms to the definition under German valuation law. Under this law, the equipment that was let along with the building should have been classified as operating equipment and thus not as real estate. Accordingly, the GmbH was not exclusively managing and using real estate. The statutory provisions however include an exhaustive list of tax-privileged activities and, according to that, the management and use of operating equipment does not fall in this category. Nor is the letting of operating equipment along with the building absolutely essential for organising the management and use of real estate in an economically viable manner. Moreover, in view of the exclusivity required by law, there is no scope for a quantitative de minimis threshold.
A stake in a pure asset management partnership
The BFH, in its judgement from 6.6.2019 (case reference: IV R 11/19), made a decision subsequent to the ruling from 25.9.2018 (case reference: GrS 2/16) of the Large Senate. The facts of the case that formed the basis of this ruling were as follows. The claimant was a KG (German limited partnership) deemed to be of a commercial nature that held a stake in a pure asset management GbR (a company/partnership under German civil law). The KG had made an extended deduction for owned real estate on the basis of the rental income that it had derived from its stake. The tax office refused to allow this because the stake in the GbR did not constitute real estate owned by the KG, but rather real estate owned by the GbR.
The BFH did not share this view. For income tax purposes, a property owned by the GbR under civil law was property owned by the partners in the GbR. This is because, for income tax purposes, the so-called Bruchteilsbetrachtung (fractional parts approach) applies to the allocation of the business assets of a pure asset management partnership. Under this approach, business assets that have several joint owners must be allocated proportionally to the parties involved. Accordingly, the KG had to be allowed to make an extended deduction for its own real estate.
A stake in a partnership deemed to be of a commercial nature
The facts of the case relating to the BFH ruling from 27.6.2019 (case reference: IV R 44/16) also involved a KG deemed to be of a commercial nature whose business purpose was, particularly, the management of its own real estate. The KG in turn had a stake in a partnership that owned real estate and which, in contrast to the controlled company in the above-described case, was deemed to be of a commercial nature. The extended deduction that the claimant was seeking to make for the rental income generated from the stake was refused by the tax office. According to the BFH, the fractional parts approach was not applicable in the case in question, in contrast to the above-mentioned mentioned case. Instead, in keeping with civil law, the business assets here should also have been allocated, for income tax purposes, to the joint assets of the partnership itself deemed to be of a commercial nature. Therefore, there was no ‘management and use of own real estate’ but rather the ‘holding of a stake’. However, the latter does not appear in the standard catalogue of activities that are not deemed to be detrimental from a tax point of view.
With this ruling the BFH confirmed its previous opinion and accordingly agreed with the tax office and likewise refused an extended deduction for owned real estate.
Please note: The above-mentioned judgements constitute just some of the various rulings on extended deduction for owned real estate. Nevertheless, these already demonstrate that the preconditions for an extended deduction for owned real estate have to be carefully scrutinised.