Extended property deduction and business lease

The so-called extended property deduction (Section 9 No. 1 sentence 2 of the German Trade Tax Act) is granted upon application to companies that exclusively manage and use their own property and only carry out certain other activities in addition to this. The trade income attributable to the transfer of property is therefore not subject to trade tax. The background to this regulation is to treat companies equally that, due to their legal form, are subject to trade tax but generate their income almost exclusively from property management activities that would not be subject to trade tax per se. The regulation thus mainly covers asset-managing corporations and commercially oriented partnerships.

In the case of a business lease, an original commercial activity is carried out, provided that the so-called lessor’s option has not been exercised otherwise, since not only the lessor’s own property but typically also other types of assets are managed and used. Consequently, the extended deduction of trade income linked to mere property management is generally not applicable in these cases. In its ruling of October 30, 2024 (case reference IV R 19/22), the Germany Federal Fiscal Court addressed the question of whether this also applies to a now purely commercially oriented partnership that leases commercial space previously used for its original commercial activity after it has ceased.

In the case in question, a commercially oriented limited partnership with a limited liability company as general partner (GmbH & Co. KG) had ceased operating a car dealership. The commercial space it had previously used itself was rented to a stock corporation (AG) that continued the car dealership business. All of the operating and office equipment, as well as all of the machinery, mechanical equipment and operating facilities, were sold to the AG as part of the lease agreement. In addition, the GmbH & Co. KG commissioned various external companies, such as a security and gatekeeper service. It passed on the costs for these services to the AG. The GmbH & Co. KG applied for the extended property deduction as part of its trade tax return, which the tax office refused after an external audit. The court of first instance agreed with the tax office.

However, the German Federal Fiscal Court clarified that a lease of a business is not detrimental to a tax deduction if the essential business assets that give the business its character are leased and these are exclusively the business’s own (developed) property, as was the case with the premises and land - in particular exhibition, workshop, office and storage space, as well as parking spaces – for the (continued) operation of the car dealership. Beyond that, neither real estate nor operating facilities that could be subject to a deduction were transferred to the tenant on the basis of the additional agreements.

Furthermore, certain ancillary activities do not result in a deduction if they serve to manage and use the property in the narrower sense and can be regarded as an absolutely necessary part of a property management and use that makes economic sense. Depending on the type and size of the property, this includes, for example, activities such as guarding the property, advertising and cleaning common areas in the rented property. The extended property deduction is only excluded if, based on the overall circumstances, special circumstances arise that give the activity as a whole the character of a commercial activity, behind which the actual transfer of use recedes.