Corporations, as well as certain partnerships, are subject to German trade tax only because of their legal form, i.e. it is irrelevant whether or not they effectively carry on a trade or business within the meaning of the German Income Tax Act. In case of the mere letting of real estate, however, the income from rentals earned by these companies or partnerships may be exempt from trade tax because they may qualify for the trade tax exemption for real estate companies (“trade tax exemption”), under which they may deduct the profit derived from the rentals from taxable income. As a consequence, the trade tax income after the deduction is typically zero.
As mentioned above, the trade tax exemption only applies to the mere letting of real property - any business/trading activity prevents the company/partnership from qualifying for the exemption. Since fixture and fittings are not considered real property under the German Valuation Act, the letting of such assets generally prevents the application of the trade tax exemption. Under German case law, there are certain exceptions, which have been clarified in the recent decision of the Federal Tax Court (BFH) (case reference: IV B 157/09).
The case involved a department store that was let, together with fittings and fixtures, such as freight elevators, lifter tables, loading docks and cooling plants. The taxpayer argued that the letting of the fitting and fixtures should be allowed under relevant case law because (i) it should be considered as a “mandatorily required part of the economically sensible lease of real estate” and (ii) because the total acquisition costs for the fittings and fixtures only amount to 7.08 % of the total investment (i.e. below a threshold as defined by case law).
The BFH, however, disagreed. The court held that the letting of fittings and fixtures would be a “mandatorily required part of the economically sensible lease of real estate” if it was economically required, i.e. “indispensable.” Otherwise, the BFH held that (although having considered a 10 % threshold with regard to the pro rata acquisition cost in earlier decisions) the threshold would not apply where the absolute acquisition cost of the fittings and fixtures exceeds 1 million DM (i.e. approximately 511.000 Euro, the threshold was set in case-law pre-dating the Euro). In addition, the court said that the (relative and absolute) thresholds would apply only to the benefit of the taxpayer if the letting of the fittings and fixtures, in addition to the mere lease of the real estate, is indispensable.
The BFH generally agreed with the taxpayer’s argument that the letting of fittings and fixtures that are an integral or a fixed part of the building could be attributed to the tax-privileged mere letting (either in general or at least for purposes of the threshold). However, the court ultimately ruled that the taxpayer did not qualify for the trade tax exemption for real estate companies because it failed to demonstrate that the acquisition costs of the (non-integral) fittings and fixtures are below 1 million DM, given that the acquisition cost for the cooling plants alone were approx. 1.3 million DM.
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