No extended reduction if the entire real estate is sold during the tax period

As part of the so-called extended reduction, the profit is reduced by the portion of the trade income that is attributable to the management and use of the company's own real estate. For this purpose, the company may only manage and use its own real estate - apart from supporting activities that are considered harmless according to case law and permitted exceptions. In its ruling of October 17, 2024 (case no. III R 1/23), the German Federal Fiscal Court (BFH) commented on the exclusivity requirement for real estate management in the event that a corporation sells all of its real estate one day before the end of the trade tax assessment period.

The subject of the dispute was the granting of the extended reduction to a limited company (GmbH) which, according to the entry in the commercial register, had the acquisition, management and sale of real estate, including the implementation of construction measures on third-party real estate, as its business purpose. The GmbH sold its only commercial property acquired in the previous year during the year. The agreements made in the purchase contract stipulated the transfer of ownership, benefits and risks as well as all encumbrances, obligations and any liability associated with the contractual property to the beginning of December 31 of the year in dispute. The tax office denied the GmbH the extended reduction subsequently applied for. As it had already sold a property in the year following the acquisition in the past, the tax office assumed (commercial) property trading instead of property management, which excludes the extended reduction.

The first instance tax court upheld the GmbH's claim and granted the extended reduction, as the GmbH only had two non-interest-bearing receivables on December 31 of the year in dispute and all income in the tax period was based on the property sold. As a result, its entire trade income in the year in dispute was attributable to the management and use of its own property.

In the course of the appeal lodged by the tax office, the BFH clarified, with reference to its previous case law, that the requirements for the extended reduction were not met in the present case. As trade tax is an annual tax, the extended reduction cannot be granted pro rata temporis. By virtue of its legal form, the plaintiff's trade tax liability also existed on the last day of the year. However, on this day, the GmbH exclusively managed its capital assets and therefore did not pursue the tax-privileged activity during the entire tax period. Consequently, the exclusivity requirement of a property management activity was not fulfilled. A “technically conditional” exception is only permitted in the case of a sale on December 31, 11:59 pm. The requirement of exclusivity would then only be undercut by one second, which - similar to a legal second - has a purely technical effect. Furthermore, the BFH confirmed its view that any exceptions to the exclusivity requirement due to their insignificance are not possible.