date | theme

8. August 2019 | The levy on trade tax: meaning – calculation and examples

15. June 2020 | Increase in the crediting of business tax to income tax

23. March 2022 | Business tax addition of rents and financing costs § 8 No. 1 GewStG (this contribution)

Operating expenses can in principle be taken into account in the determination of the trade tax measurement amount in a profit-reducing manner. On the other hand, the trade tax addition according to § 8 no. 1 GewStG leads to the deducted costs being added back to the business income. We explain which financing costs are added, what impact this has and what amount of allowance there is.

In principle, the basis of assessment of trade tax according to § 7 GewStG for the determination of business income links to the profit determined according to the provisions of the Income Tax Act or Corporate Tax Act. Nevertheless, § 8 GewStG contains a trade tax modification in the form of the trade tax addition of certain expenses. The result is a kind of operating expense restriction. Especially for financing costs, the trade tax add-on according to § 8 no. 1 GewStG applies.

The addition of the financing costs, however, requires that the expenses have reduced the profit at all. Therefore, the addition is omitted if the expenses were to be capitalised as the cost or production cost of an asset of fixed assets or current assets and thus did not reduce profit. This also applies to the extent that the expenses have been taken into account solely by way of depreciation for wear and tear reducing profits. There is therefore no downstream addition. An addition is also omitted if the assets are triggered again before the balance sheet date and are not actually activated at all. This is due to the fact that the costs lose their original character as expenses as a result of the requalification into production costs. In addition, the addition is also omitted if the expenses were subject to a tax deduction restriction. If, however, the expense has been deducted incorrectly in the determination of the profit, no trade tax is added. The result is an always strong deviation of the trade tax base from the income tax or corporate tax base.

The purpose of the trade tax addition is to determine the objective business income. The objective business income is the earned income of the holding irrespective of the manner in which the remuneration for the capitalisation of the holding is paid. Therefore, it is to be ensured that the income which the business actually generates as such is taxed. Legal orientation is a typical company that is financed by equity and works with its own assets. Nevertheless, the objectiveized profitability is difficult to grasp, so that the trade tax add-on is in practice regularly susceptible to dispute.

If, however, as a result of the additional taxation, the company is taxed in substance, this burden success is invested in the legislative concept of an income-oriented property tax. Therefore, the law does not provide for a waiver of business tax due to material unreasonableness. Especially for commercial enterprises with a low capital base, the trade tax add-on according to § 8 no. 1 GewStG can lead to considerable burdens. Especially in economically tense times, the financing needs of companies increase, so that it comes to a larger extent to the addition. In addition, in particular in the case of multi-level shareholding relationships, insofar as there is no body, a trade tax multiple burden may arise.

The trade tax addition is subject to various financing costs, such as fees for debts, pensions, permanent charges, profit shares of the silent partner or rental interest and rental interest for the use of immovable assets. § 8 No. 1 GewStG therefore contains all additional events for cash transfers and capital transfers in kind.

§ 8 no. 1 letter a GewStG constitutes the basic event for capital transfers. Remuneration for debts in this sense is the consideration for the provision of outside capital. The concept of debt remuneration, however, is broader than the concept of civil interest. Therefore, it also includes other services that the borrower has to provide to the lender for the use of the debt. The only decisive factor is the economic content of the service, so that the designation does not matter. However, interest is only deductible if it has not been limited in its deductibility by the interest rate barrier of § 4h EStG or § 8a KStG.

§8(1)(b) GewStG covers all pensions and permanent charges deductible under the income tax valuation. For example, if a company is financed by assuming a pension obligation vis-à-vis the vendor, it shows a lack of equity, just as in the case of a loan. Accordingly, for example, annuities must be distinguished from purchase price claims. The motive of this additional charge lies in the financing character of the assumption of pension obligations.

Rental interest, rental interest and leasing instalments are to be added irrespective of the subject matter of the transfer. The sole prerequisite is therefore that the assets are assets owned by another. However, the requirement is not limited to long-term transfers of use. In the case of movable assets, the amount to be added is 5 per cent, while in the case of immovable assets it is 5 per cent of the remuneration.

According to § 8 no. 1 letter f GewStG, 6.25 percent of the expenses for the temporary provision of rights, in particular concessions and licenses, are to be added. This additional charge therefore means increased burdens, especially for research and innovative companies within a group, and applies above all when the license barrier applies. Only distribution licenses are excluded. These serve solely to transfer rights derived from third parties and thus a pure commercial agent activity.

The amount of the addition of financing costs is usually 1/4 of the total cost. Nevertheless, there is also an allowance in connection with the trade tax add-on. Accordingly, an addition only takes place if the financing fees in the sum exceed the amount of 100,000 euros.

Technical advice for

Corporate Taxation?

The corresponding contracts can also have mixed content on a regular basis. Then the question arises as to how these are to be assessed under the regulation of § 8 no. 1 GewStG. If the individual contents of the contract are separable, the fee may be divided by an estimate. Only the financing content is then subject to the addition. Therefore, it may be appropriate to show separate fees in the invoice. On the other hand, if the individual components of the contract are not separable, a division is not possible in the opinion of the tax administration. Rather, the assessment is then based on the content of the contract, which defines the contract itself. Only if such a thing does not fall under § 8 no. 1 GewStG, an addition is not considered. Otherwise, an addition is made in whole.