Under the extended traded tax deduction, rental income derived by entities that normally would be subject to trade tax, but whose activities are limited to the administration of their own real property, is exempt from trade tax.
The Federal Tax Court (BFH) recently had to rule on a case in which an asset managing company rented real estate to a sister company that was held by the same individual (case reference: X R 4/10). The sister companies formed part of the same tax group (Organschaft) for tax purposes. Technically, although the entire tax group is viewed as a single taxpayer, trade tax income is determined at the level of each entity and then pooled at the level of tax group parent. When calculating the income of each entity, the asset managing company claimed the extended trade tax deduction on its net rental income, whereas the sister company fully deducted the rental expense (without having to apply the regular add-back).
Since this calculation mechanism effectively led to a situation that – from a group perspective – created negative income in the amount of the net rental income, the court disallowed the application of the extended trade tax deduction. The BFH allowed the application of the simple trade tax reduction though, since this deduction only aims at preventing a double charge of trade tax and real estate tax.
The decision, which is the first rendered by the BFH on this issue, is line with rulings by several lower tax courts.
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