In a decision dated 17 December 2009, the Federal Fiscal Court ruled that personal or financial reasons for a sale of property are irrelevant in determining whether the property should be considered part of an active property dealing business or as passive property management. According to the decision, this rule also should apply where the sale is the result of economic constraints, such as pressure from the financing bank or a threat of compulsory measures.
According to prevailing case law, the overall circumstances and prevailing public perception are decisive in distinguishing between an active property dealing business and passive property management. Passive property management exists where the activities are limited to the use of the property, including situations in which obtaining benefits from the property by regrouping/shifting/replacing/etc. the property investment is not the predominant purpose. By contrast, an active property trade will arise if there is a short period of time between the acquisition/construction and sale of the property (i.e. five years where at least four properties are sold).
A presumption of an active trade cannot be rebutted simply because the initial intention was to lease and this intention was abandoned when the property was sold as a result of pressing or unintentional reasons (e.g. divorce, financial difficulties, illness, an unexpected high purchase offer), because the existence of these reasons does not mean that the owner would have been prepared to sell for other reasons. This also applies where a financing bank compels a sale to avoid an auction. The intention to sell can only be disproved by the existence of factors that substantially impede a future sale, such as long-term financing or a lease.
The Federal Fiscal Court has followed its jurisprudence to the effect that the characterization of a taxpayer as a property dealer does not depend on the intention of the seller; instead, the determination must be based on objective criteria.
As a result, companies regarded as property dealers under the above principle cannot make use of the extended trade tax deduction and cannot benefit from a tax deduction by way of regular depreciation, as the property will be reclassified as current asset for tax purposes.
Contacts
Dr. Bettina Lieber | Düsseldorf
Petra Peffermann | Frankfurt
