Generally, the establishment of a usufruct of a benefit over a rental property in favour of a close relative will be recognised if the usufruct is agreed as if between unrelated third parties and actually implemented. Moreover, the usufructuary has to hold the legal status of a landlord vis-à-vis the tenants. If these conditions are satisfied then the income from letting will no longer be attributable to the owner but, instead, to the usufructuary.
The Berlin-Brandenburg tax court, in its decision of 21.3.2022 (case reference: 6 K 4112/20), had to rule on a case where the parents had created a usufruct for their dependent children, for a limited period, over a real property that was leased out for the long term, up to the end of the usufruct, to a GmbH [limited liability company] controlled by the parents. In the reasons for its ruling, the court considered supreme court case law in detail and ultimately rejected the present arrangement.
The non-recognition of the usufruct was a consequence of the fact that a GmbH controlled by the parents could not be regarded as an unrelated third-party entity. The decision-making process was thus not independent of the parents. Furthermore, the time-limited transfer of a lease agreement between the parents and the GmbH, which is non-cancellable for an identical period of time, to the under-age children seems to be uneconomic.
Please note: In the appeal (case reference: IX R 8/22), the Federal Fiscal Court will now have to conclusively rule on whether or not this usufruct of a benefit constitutes abusive structuring with the aim of using the children’s tax-free allowances and lower tax progression.