Requirement to discount liabilities in the tax accounts
Under Section 6(1) no. 3 of the Income Tax Act (Einkommenssteuergesetz, EStG) non-interest-bearing liabilities with a remaining term of more than one year have to be discounted (in the tax accounts) at an interest rate of 5.5%. This applies accordingly to provisions in the accounts. A liability that only has to be settled in the future is less of a burden for the debtor than one that has to be settled immediately. Even without an explicit interest rate arrangement, besides a redemption component, an interest component will also be included. Here, the requirement to discount is based on the principle that payments that do not have to be made until the future have to be shown at their present value today (this was also what the Federal Fiscal Court (Bundesfinanzhof, BFH) decided in its ruling of 22.5.2019, case reference: X 19/17, German Federal Tax Gazette II 2019 p. 795).
For years, numerous proceedings before the BFH have documented the doubts about, among other things, the interest rate level and its rigidity. The BFH was of the view that the requirement to discount non-interest-bearing operating liabilities at an interest rate of 5.5% for financial years up to and including 2010 was constitutional. According to the Münster tax court, for 2013 there were likewise no serious doubts about the constitutionality of Section 6(1) no. 3 sentence 1 EStG with its standardised fixed discount rate of 5.5% (decision of 5.5.2021, case reference: 13 V 505/2).
Amendment only for liabilities and not for provisions
In the future, liabilities and provisions will be treated differently. Under Section 6(1) no. 3 EStG, as amended, from now on liabilities will have to be recognised at the cost of acquisition, like land, shareholdings and current assets. The requirement to discount non-interesting-bearing liabilities with a remaining term of more than one year has been abolished. However, for provisions, the rules that hitherto were explicitly for liabilities will still apply. Provisions for liabilities have to be discounted at an interest rate of 5.5%; provisions with a remaining term of less than one year, or provisions for interest-bearing liabilities are exempted from the discounting requirement.
Scope of application and background
The new regulations described here will have to be implemented for the first time for financial years ending after 31.12.2022. Upon application, it would be possible to also implement these rules for earlier years. An application would however then have to be made for any and all financial years on a uniform basis.
The abolition of the discounting requirement for liabilities was based on an initiative of the Bundesrat. An additional tax charge resulting from the discounting in the year when the liability is recognised for the first time will no longer be necessary in view of the already protracted run of very low interest rates. The elimination of the requirement to discount liabilities is moreover an effective contribution towards the de-bureaucratization of tax law and towards tax simplification.
Please note: Insofar as there is a liability from previous years then a reduction in taxable profit will occur in the amount of the discounting volume that still existed at the end of the last financial year. Transitional arrangements, for example, in the form of spreading the expense over several years, are currently not anticipated.