If entrepreneurs sell assets of fixed or working capital and this results in the discovery of hidden reserves, the resulting capital gain is in principle taxable in the year of the sale. Exceptions apply, however, if the asset ceases to be operational assets due to force majeure or administrative intervention. In this case, the entrepreneur can form a reserve for replacement procurement (RfE for short). Similar to § 6b EStG, it reduces profit and reduces the acquisition or production costs of the new economic good.

But what exactly are the principles when creating and dissolving a reserve for replacement?

1. Overview of the reserve for replacement procurement

If an entrepreneur (sole proprietorship, partnership or corporation) sells assets, a profit is often generated. If this is the case, the profit also arises if the respective object is withdrawn from the business assets against the will of the entrepreneur – for example, by expropriation or force majeure.

Example: A sole proprietor has recorded a vehicle with a book value of EUR 10,000 in his balance sheet. The vehicle is destroyed by a storm, so that the comprehensive insurance pays out EUR 80,000 (the market value). The entrepreneur now generates a profit of EUR 70,000.

By a reserve for replacement, the entrepreneur can avoid the taxation of this profit. It therefore forms a reserve of EUR 70,000 and transfers it to the economic asset acquired as an alternative. This would be a new vehicle in this case, for example for a purchase price of EUR 100,000.

The transfer of the reserve for replacement procurement to the replacement asset reduces its acquisition costs accordingly. In this example, the vehicle is not EUR 100,000, but only EUR 30,000 in the balance sheet. These EUR 30,000 are also the basis for the deduction for wear (AfA; depreciation).

The entrepreneur thus avoids the immediate taxation of the “profit on sale” by creating the reserve for replacement procurement. At the same time, he is obliged to purchase a similar economic good. If such an acquisition does not occur, the entrepreneur must dissolve the reserve in the following year. It then increases, as would have been the case originally, the respective annual profit of the company.

Conditions and consequences of setting up a reserve for replacement

The reserve for replacement procurement is a special form of provision developed by the Bundesfinanzhof (BFH). Like, for example, the division of operations, it thus finds its origin exclusively in case law and not directly in law. The BFH established its principles in this regard, inter alia, by judgment of 12.06.2001 (XI R 5/00) and further specified them in the following years.

The financial administration has adopted the case law of the BFH. Today, the reserve for replacement is therefore regulated in the income tax guidelines, specifically in R 6.6 EStR.

Let us take a look at the conditions for the formation of the reserve, its transfer and the possible necessary dissolution.

2.1 Requirements for forming an RfE

The basic prerequisite for the formation of a reserve for replacement procurement is first of all the so-called profit realization. The respective incident (force majeure or government intervention) must therefore generate a profit analogous to the sale of the asset. This is the case if the entrepreneur earns a proceeds through the incident that exceeds the current book value of the asset.

The realization of profit must occur according to R 6.6 paragraph 1 sentence 2 EStR by force majeure or an administrative intervention. Such a case shall be considered by the tax authorities to be present in the following circumstances: