In order to mitigate the negative economic consequences of the initial restrictions and business closures due to the Corona pandemic, solo self-employed, professionals and small businesses with up to 10 employees can apply for the so-called Corona emergency aid. This is a one-off grant. It seems questionable how these subsidies should be treated for tax purposes.

How corona losses can be neutralized by fictitious gains

1. The Corona emergency aid

The emergency corona aid is a grant paid to mitigate the negative economic consequences of the corona pandemic. In order to receive this subsidy, the claimant must prove that he is directly and not insignificantly economically affected by the crisis. The grant shall consist of a cash payment not linked to the provision of a consideration or to an investment. Moreover, it must be repaid only in certain cases. The applicants are domestic solo self-employed persons, liberal professions and small enterprises including farmers with up to 10 employees who are economically active in the market as a company. The individual federal states have taken over the implementation and payment.

2nd income tax and Corona emergency aid

Under the above-mentioned characteristics of the emergency aid, it is now necessary to clarify how it is to be treated fiscally. A distinction must be made between income tax and sales tax. In the case of income tax, it remains relevant whether the company is liable for income tax or corporate tax.

2.1 Use of the emergency corona aid is relevant

The Corona emergency aid is to be subject to both income and corporate tax. However, this requires that the grants are operationally initiated (§ 4 (4) EStG e contrario). In this context, the reason for the subsidy is decisive. As soon as part of the money is also paid to cover the private subsistence, one can doubt the operational cause.

In North Rhine-Westphalia, for example, it was initially assumed that the funds could also be used for private purposes. Only on 1.4.2020 was the restriction made that the money may only be used for operating expenses and financial expenses. From this point onwards, only access to benefits under the Social Code II is to be facilitated, in particular to unemployment benefits. As a result, the state of North Rhine-Westfahlen has decided that solo self-employed persons who submitted the application for Corona emergency aid in March or April 2020 can use a one-off 2,000 euros to finance their livelihood. Otherwise, however, the money may only be used for operational purposes.

It is therefore quite reasonable not to regard the 2,000 euros, which may also be used for living, as professionally motivated. Under this assumption, the 2,000 euros is a private contribution, which then reduces the profit again and is therefore profit-neutral. Then the 2,000 euros are not subject to income tax, but are attributable to the private sphere. This would require that the taxpayer can clearly prove that he has legitimately used the 2,000 euros of the Corona emergency aid to cover private expenses.

On the other hand, this would be different for persons liable for corporate tax. There is no private sector there. There would also be the 2,000 euros to tax.

2.2. Emergency Corona Assistance in Business Assets Comparison

If, however, the subsidy is used for operating purposes, a distinction must be made between the profit determination according to the business assets comparison (§ 4 (1) EStG) and the surplus income account (§ 4 (3) EStG) in the context of income tax.

The subsidy increases the profit under commercial law when determining profit by comparing operating assets (§ 5 (1) sentence 1 EStG in V. m. § 238 HGB). R 6.5(2) EStR provides for the right to choose grants. Accordingly, the taxpayer can opt for a performance-neutral treatment of subsidies. It can therefore deduct the amount of the grant from the production or acquisition costs of the asset for which the grant was granted. However, emergency aid is paid so that the entrepreneur can continue to make current payments despite the losses. Therefore, the grants cannot classify the acquisition or production costs of an asset. Consequently, the right to choose R 6.5 paragraph 2 EStR is not relevant. Moreover, no other tax exemption rules are apparent. Therefore, the immediate Corona aid used for operational purposes is taxable.

Freelancers and non-accountants regularly determine their profit through the revenue surplus account (§ 4 (3) EStG). With appropriate justification, as above, the right to vote under R 6.5 paragraph 2 EStR does not apply here either. Therefore, the payments in the income surplus account must also be recorded as operating income by way of emergency aid and increase the tax profit at the time of the inflow (§ 11 EstG).

2.4 Effects

Furthermore, it has to be clarified which effects the obligation to tax the Corona emergency aid has. If the basic allowance of 9,408 euros for 2020 is not exceeded, there are no effects on the controllability. If, despite the grant, a loss has been incurred, the immediate grant has been added to the loss carry forward in future years. In addition, the tax liability of the subsidy only applies when the tax return for 2020 has to be submitted.

3rd Corona emergency aid and VAT liability

In contrast, the sales tax on the Corona emergency aid has to be assessed differently. The immediate corona assistance is not due to a power exchange. Therefore, there is no taxable service within the meaning of § 1 (1) no. 1 UStG. Therefore, the Corona emergency aid is genuine, non-taxable grants.

For this reason, the Corona emergency aid must not be included in the VAT advance notifications or in the VAT annual returns. Furthermore, the grants are not to be entered in the ratios 48 (tax-free transactions without deduction of VAT) or 45 (other non-taxable transactions whose place of performance is not in the country). This is because these indicators are not intended for real subsidies. Care must therefore be taken that no entries are made here. Otherwise, there may be questions on the part of the tax office. This may result in a time delay in the processing and booking of the VAT advance notifications submitted and in the refunds of the VAT overhangs notified. Furthermore, the inclusion of the Corona emergency aid in the small business test limit according to § 19 paragraph 1 UStG is ruled out.