date | theme

20. May 2021 | Reserve for the replacement in case of departure of assets (this contribution)

04. September 2020 | §6b Reserve – current jurisdictions

14. October 2019 | Sell GmbH shares tax-free – § 6b Abs. 10 EStG

The fact that assets leave a company is not always avoidable. However, in economic activity, there are also some unwanted, forced departure of economic goods from a company. This can have devastating economic consequences for the company and shareholders. In order not to be discriminated against by taxing the urgently needed compensation payments or damages, they should be able to be transferred to the same when a functionally equivalent asset is purchased again. Building on § 6 EStG, it was stated in the Income Tax Directive R 6.6 EStR that, under certain conditions, a reserve may be created for the replacement. This option sounds very complicated at first, but works quite similarly to the more familiar regulation for the reserve according to § 6b EStG. It is possible that hidden reserves can be transferred to other specially defined assets when selling assets. The regulations to be observed in the context of the income tax directive R 6.6 are explained in more detail below.

§ 6b reserve: Sell business real estate TAX FREE?

1.Requirements for using the reserve according to R 6.6 EStR

1.1. Withdrawal of an economic good

First of all, it must be clarified in which cases the reserve according to R 6.6 EStR can be used at all. Unlike the § 6b EStG reserve, a very strict procedure must be followed. Because it is of particular importance that economic goods are forced out of the company's operating assets. This can be done for various reasons.

This includes, for example, a departure due to force majeure. This is defined as an exceptional event which the taxpayer could not have prevented. Among other things, this would be given in the case of natural disasters, theft or destruction as a result of a fire. In addition, the taxpayer may be indirectly forced to sell the asset, otherwise an administrative intervention will take place or has already taken place. This would also be the case for a sale of assets due to an otherwise due expropriation.

Example:

In 2018, a building at Company A will be eliminated from operating assets due to a fire. The remaining book value of the building was EUR 20,000. However, the insurance paid the company a compensation of EUR 70,000 for the departure of the building.

1.2. Replacement of an economic good

Since an economic asset has already left the company assets, it is basically only necessary to replace it. However, it is particularly important to note that an economic good with the same function must be purchased. Otherwise, no transfer of the revealed hidden reserves to the newly acquired functionally equivalent asset can take place.

It is also important to know that fixed and working capital assets benefit from this directive. Thus, an asset of these categories must first be eliminated so that the hidden reserves can subsequently be transferred to an acquired asset of the same function.

1.3 Deadline for the formation of the reserve and replacement

Now, as with § 6b EStG, certain deadlines for the formation of the reserve according to R 6.6 EStR must be observed. In addition, the timing of the replacement procurement is of particular relevance for the proper use of the exempt transfer of the hidden reserves to the replacement asset.

Insofar as the asset has left, as in the previous example in 2018, a reserve in the amount of the received compensation less the book value of the asset has to be formed with the submission of the tax return for this year. Consequently, in this case a reserve of EUR 70,000 (compensation) – EUR 20,000 (BW retired WG) = EUR 50,000 would be appropriate. This only applies if no replacement WG has yet been purchased.

Furthermore, the deadline for the replacement of a functionally equivalent asset must be met. In the case of movable assets, the replacement must take place at the latest by the end of the first year after the creation of the reserve. On the other hand, a period of two years applies to land and buildings. Thus, in our example, the latter can first be assumed, but the deadline can be opted for by credibly confirming the investment intention in addition to the deadlines of § 6b EStG. This is already done by the proper formation of the reserve. This increases your period for using the reserve for movable WG to four years and for immovable WG to a full six years.

However, a late submission of the tax return for the assessment period of the creation of reserves may override the investment intention. This should necessarily be submitted before the deadline for the replacement procurement. Therefore, it is important that you ask early if you need help with the use of reserve formation. We are happy to help.

2nd reserve for replacement: use of hidden reserves

For the further use of the revealed hidden reserves, there are now two options, which are shown below.

2.1. Replacement in the year of departure

On the one hand, there is the option to purchase a functionally equivalent asset directly in the year of the departure of an asset of fixed or working capital. The economic good is referred to as a substitute economic good. In this case, the hidden reserves are transferred directly to this economic asset. Thus, the acquisition and production costs are reduced by the amount of the hidden reserves. This also reduces future depreciation, since the initial book value is lower than the acquisition and production costs incurred.

Continuation of the example:

After the property was removed in 2018, company A purchased a functionally identical building for the price of EUR 60,000 directly in the same year. Thus, without the formation of a reserve, the transfer of the hidden reserves can take place immediately. In this case, only a proportional transfer of the hidden reserves is possible, since the purchase price is below the compensation payment.

The value of the hidden reserves is EUR 50,000. Since the building price is now below the compensation price, it is necessary to reduce this proportionately. Consequently, the proportionate hidden reserves must be determined:

EUR 50,000 x EUR 60,000 / EUR 70,000 = EUR 42,857

The acquisition costs of the new building are to be reduced by this amount. This results in an appraisal of EUR 17.143 in the balance sheet of company A. The AfA must also be determined in accordance with normal requirements. If you have any questions, please contact us.

2.2. Reserve for future replacement procurement

Otherwise there is the possibility to form a reserve for future replacement purchases. The exposed silent reserves are set here. In addition, when the replacement purchase is made, the same process is carried out as in the procurement in the same year. In doing so, the company writes off the reserve and transfers it to the asset.

In conclusion, it can be said in both variants that, as with § 6b EStG, a tax deferral effect is the result.

3rd purpose of the reserve for replacement

The formation of a reserve in the year of the departure of an asset serves to subsidize the seriously planned replacement procurement of the asset in future marketing years. The idea is that any damages or compensation received for the new acquisition of the retired asset should be retained. This also includes any redeemed sale price for assets that have been sold to protect them from force majeure or expropriation. In accordance with R 6.6 EStR, the vendor places the hidden reserves, which are discovered through a sale, in the reserve for future replacement purchases. Thus, the reserve prevents a taxation of hidden reserves, which would never have come about without this exceptional reason, and also secures more capital for future investments in functionally equivalent assets.

In § 6b EStG, only certain assets of the fixed assets are included in the sale criterion. In addition, these must be part of the operating assets for at least six years. The directive does not contain either of the two limits.

However, the transfer of the share of hidden reserves in the case of replacement acquisition is only possible to economic goods of the same function. In § 6b EStG, these can also be transferred to other assets, but only to a few specific ones.

4.2.

R 6.6 EStR restricts the compulsory departure of the asset. On the other hand, according to § 6b EStG, any sale is to be classified as such, provided that the requirements for the assets are met.

4.3 Shared transfer to replacement

The exclusively proportional transfer of the hidden reserves applies only to the replacement procurement according to R 6.6 EStR, but not according to § 6b EStG. Only the percentages of value of the asset sold apply here.

4.4 Investment intention

One of the biggest differences is the investment intention. Because with the § 6b reserve this is not needed. However, it is necessary to dissolve an unjustly formed reserve in a profit-enhancing manner and also to interest the outstanding tax payment high. On the other hand, a firm intention to purchase a similar economic good under R 6.6 EStR is necessary. However, if the purchase fails, no interest on the avoided tax payment must be made.