In a recently published decision, the Federal Tax Court (BFH) ruled on the question when handling fees incurred in connection with a loan agreement may be treated as immediately deductible business expenses (case reference: I R 7/10).
In the case, a German company (claimant) took out three publicly subsidized loans, two of which were subject to handling fees, which were not dependent on the term of the loan (the fee was 4 % of the loan amount). The claimant treated the handling fees as immediately deductible business expenses, whereas, based on the German tax authorities’ approach, the expenses should have been recorded as prepaid expenses and been expensed on a pro rata basis.
Even though the BFH did not issue a final decision in the case because certain facts still need to be clarified by the lower tax court, the BFH set out several principles with respect to the tax treatment of handling fees. According to the court, the tax treatment of handling fees should primarily depend on the terms agreed with respect to an early repayment:
- If, in the case of an early repayment, the borrower is entitled to a pro rata refund of the handling fees charged at the time the loan was granted, the fees should be treated as expenses for a certain period (i.e. based on the maturity of the loan) and, thus, may not be booked as immediately deductible business expenses.
- If the borrower is not entitled to claim a (partial) refund of the fees charged at the time the loan was granted, the fees should be viewed as a one-time charge, and thus, be treated as a one-time and immediately deductible expense, unless the underlying loan agreement:
a) has fixed conditions for several years, and
b) may be cancelled only for good cause, and
c) there are no specific reasons to assume that the contracting parties viewed a good cause cancellation as more than a theoretical possibility.
If these three requirements are met, the handling fees should be viewed as expenses for a certain period as described under (1.).
When determining whether fees incurred on loan agreements may be deducted immediately, taxpayers will have to determine how these fees would have to be treated in the event of an early prepayment according to the underlying loan agreement. For this analysis, taxpayers also will have to take civil law case law into account as to whether and when fees may have to be repaid by the financing bank upon early repayment.
If you have any questions, please contact the authors of the article at gtln@deloitte.de or your regular Deloitte contact.
