Deferral of a purchase price claim - Taxable capital gains despite interest waiver?
Recently, in a case that involved real estate sales within a family where the payment of the purchase price was deferred, the Schleswig-Holstein tax court was asked to give a ruling on whether or not this gave rise to income from capital assets. This ruling is particularly interesting because it also deals with the issue of whether or not it is possible for both gift tax and income tax to be incurred in a single case.
Transfer of real estate to the daughter
In its ruling of 17.9.2024 (case reference: 4 K 34/24, appeal before the Federal Fiscal Court (Bundesfinanzhof, BFH) - case reference: VIII R 30/24), the Schleswig-Holstein tax court ruled on the following case. The claimants had sold to the daughter a homesite held as private assets. Payment of the full purchase price was deferred in the notarised transfer agreement and was supposed to be paid in monthly instalments. Interest was expressly excluded in the agreement. The waiver of interest was put on record as a gift to the daughter. However, the local tax office assumed that there was a hidden interest component in the instalment payments; it deemed these to be income from capital assets and subjected them to tax in accordance with Section 20(1) no. 7 of the German Income Tax Act. Following an unsuccessful appeal against this decision, the taxpayers brought a legal action.
Taxable capital gain?
The Schleswig-Holstein tax court upheld the complaint. In the opinion of the court, no taxable capital gain had arisen from the specific contract arrangements. Admittedly, the deferral of the payment of the purchase price could generally be considered as granting a loan with a possible capital gain; however, this would not apply if an interest waiver has been expressly agreed and qualified as a gift. In this case, the calculated difference between the nominal purchase price and a notional present value should not be classified as a fee for providing capital, but rather a generous gift. For this the primacy of the application of gift tax comes into effect so that recognition for income tax purposes is ruled out.
In an earlier decision, the Cologne tax court (ruling of 27.10.2022, case reference: 7 K 2233/20, appeal before the BFH - case reference: VIII R 1/23) took a different view. This court considered the double burden from income tax and gift tax to be inherent in the system and constitutionally unobjectionable if each individual tax was consistently applied.
Therefore, the question as to whether an interest waiver as part of an agreement to pay in instalments triggers taxable income or whether it should be classified as a gift has not yet been definitively clarified. In the pending appeals proceedings, the BFH will have to decide whether or not, in such cases, the taxation of income has in actual fact to retreat behind gift tax.
