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Extended trade tax deduction – Letting of operating equipment along with a building is excluded

When business enterprises calculate their trading profit (the assessment base for trade tax) they are allowed to deduct a flat rate of 1.2% of the assessed value of their commercial real estate so that the real estate that forms part of their business assets is not simultaneously burdened by real estate tax and trade tax. Within the framework of the extended trade tax deduction, companies that exclusively manage their own real estate are able to make a deduction of that part of their trading profits that is attributable to the management and use of their own real estate.

According to the established supreme court case law, if a company also lets out operating equipment or other movable assets in addition to the real estate then such an activity would preclude an extended deduction. This shall also apply even if this happens to a negligible extent because, under German valuation law, operating equipment is not a part of real estate. According to a ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH) from 28.11.2019 (case reference: III R 34/17), in the case in question the extended trade tax deduction was however not cancelled because, under the terms of the rental agreement for the real estate where the building was still to be constructed, all expenses related to the operating equipment were to be borne by the tenant, there was no intention to let out the operating equipment together with the real estate and the tenant would be the beneficial owner of the equipment. In the case in question, a negligible amount of costs for the operating equipment was not passed on to the tenant. The local tax office and the tax court considered this to be harmful from a tax point of view; by contrast, the BFH clarified that the letting of operating equipment along with a building can be effectively excluded under both civil and tax law.

Result: Therefore, beneficial ownership is generally decisive for an extended trade tax deduction. It will still be necessary to ensure that real estate and operating equipment are kept strictly separate, however, inadvertently failing to transfer operating equipment to the tenant is not harmful if there is an agreement where it is stipulated that the expenses for the operating equipment will generally be borne by the tenant.

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