BFH on the extended trade tax deduction for real estate companies

Thanks to the extended trade tax deduction according to Sec. 9 No. 1 p. 2 GewStG companies which – solely by virtue of their legal form – are subject to trade tax are allowed to claim a deduction on their trade income if they exclusively use or manage their own properties or capital assets. The question was raised as to whether "own" property also includes the property of a purely asset managing subsidiary partnership. This question was answered by the Grand Senate of the BFH with its resolution of 25 September 2018 (GrS 2/16) that shares the opinion of most of the relevant literature. The BMF which joined the proceeding had an opposing view and denied the applicability of the extended trade tax deduction in such cases. Therefore, the reaction of the BMF to the decision of the Grand Jury of the BFH remains to be seen.

1. Decision

On 21 July 2016, the IV. Senate submitted the legal question to the Grand Senate of the Federal Finance Court (BFH) as to whether a company subject to trade tax solely by virtue of its legal form should be denied the extended trade tax deduction according to Section 9 No. 1 Sentence 2 of the Trade Tax Act (GewStG) because it holds an interest in a purely property managing, non-commercial partnership. In the underlying proceedings, the plaintiff, a GmbH & Co. KG deemed to be active in trade or business (gewerblich geprägt), was denied its claim for the extended trade tax deduction. It held interest in another partnership (GbR) which was a purely property managing company and the owner of real estate. The plaintiff claimed the extended trade tax deduction for its pro rata rental income from this investment. This was denied because the plaintiff itself was not the owner of real estate from a civic law perspective and the participation in the GbR did not constitute own real estate within the meaning of Sec. 9 No. 1 Sentence 2 GewStG.

The IV^th Senate found that the extended trade tax deduction must be granted to the plaintiff, as the property of a purely asset managing partnership is proportionately attributable to the shareholders for income tax purposes. However, the IV. Senate was prevented from making this decision by a judgment of the I^st Senate which had decided that is not sufficient to hold real estate through the participation in an asset-managing partnership in order to claim the extended trade tax deduction but that the taxpayer must be the owner of real estate under civil law (BFH of 19 October 2010, I R 67/10).

In its decision, the Grand Senate endorsed the opinion of the IV^th Senate as well as the predominant opinion of the relevant literature. The real estate of an asset managing, non-commercial subsidiary partnerships qualifies as "own" real estate of the parent company, since it is not the ownership according to civil law that is decisive with regard to the extended trade tax deduction, but the allocation for tax purposes. From a tax point of view, the fractional consideration resulting from Sec. 39 Par. 2 No. 2 of the General Fiscal Code (AO) leads to a pro rata allocation of the real estate to the business assets of the shareholder. According to both the system of the Trade Tax Act and the regulatory purpose of Sec. 9 No. 1 S. 2 GewStG as well as the historical regulatory context the extended trade tax deduction has to be granted to the plaintiff.

2. Context

Commercial partnerships and corporations are generally subject to trade tax. When calculating the trade income pursuant to Sec. 9 No. 1 Sentence 1 GewStG, there is a so-called simple deduction for real estate belonging to the business assets of the company. Pursuant to Sec. 9 No. 1 Sentence 2 GewStG, companies that exclusively manage and use their own real estate or their own capital assets are entitled to the so-called extended trade tax deduction equal to the fraction of their trade income that is attributable to the management and use of their own real estate.

The tax authorities and the I^st Senate of the BFH had so far taken the view that "own" real estate in the sense of the extended trade tax deduction could not be real estate whose owner under civil law is not the taxpayer himself. The Federal Ministry of Finance (BMF), which joined the proceedings, pointed out in its statement that the Federal Constitutional Court had decided several times in the past that it could not be objected for the legislator to narrowly limit the scope of entrepreneurs entitled to the extended trade tax deduction.

The consequence of this point of view is that the income a purely asset-managing partnership realized from the administration and use of its real estate property was subject to trade tax at the level of a corporation or partnership deemed to be active in trade or business that participated in it, even if the partner itself was only active in asset management and was therefore only liable to trade tax due to its legal form. However, the shareholder could have made use of the simple reduction in accordance with § 9 No. 1 S. 1 GewStG for the real estate of the asset-managing subsidiary partnership, since the tax authorities agreed that this reduction was not based on the ownership of property from a civil law perspective, but rather its allocation for tax purposes. In accordance with Sec. 39 Par. 2 No. 2 AO, the deduction is calculated for the shareholders in accordance with interest held in the subsidiary (proportional consideration).

3. Implication

The decision of the Grand Senate can be viewed positive from the point of view of property owning companies. Following the argumentation of the court, the participation in a purely asset managing, non-commercial partnership which holds real estate does not have an adverse effect on the utilization of the extended trade tax deduction, neither at the level of a corporation nor at the level of a partnership that is deemed to be active in trade or business, provided that the other prerequisites for the deduction are met. It should therefore also be possible to make use of the extended trade tax deduction if real estate is held partly by the company itself and partly through a purely asset managing subsidiary partnership. For real estate companies, this leads to a bigger variety of investment opportunities. However, the reaction of the tax authorities remains to be seen.

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