Burden of proof in balance sheet corrections
FG Münster (Münster Fiscal Court) has addressed the tax treatment of liabilities that can no longer be clarified (FG Münster, judgment of 17 September 2025 – 13 K 1637/22 K, F). According to the decision, the taxpayer bears the burden of proving whether a balance sheet correction pursuant to § 4 Abs. 2 Satz 1 EStG (German Income Tax Act) must be recognised through profit or loss or without affecting profit if the relevant circumstances can no longer be established.
The claimant in the proceedings was a GmbH (German limited liability company). The dispute concerned corporate income tax and separate determinations. The case centred on older loan liabilities for which neither loan agreements nor declarations of waiver or shareholder resolutions could be produced.
Requirements for recognising a liability
Specific and enforceable obligation to perform
Under the criteria applied by FG Münster, a liability may be recognised as at the balance sheet date only if the business owner is subject to an obligation to perform that is defined in terms of its nature and amount and is enforceable by the creditor. In addition, the obligation must constitute an economic burden.
Under § 5 Abs. 1 EStG and the principle that the commercial balance sheet governs the tax accounts, the requirements under commercial law for recognising liabilities also apply to the tax balance sheet. If the necessary criteria are not met, the corresponding balance sheet item is incorrect.
Missing documents in the case at issue
With regard to the disputed loan liabilities, it was no longer possible to establish the basis on which they continued to exist or how they were to be treated during the relevant period. In particular, the following documents required for the assessment were missing:
- loan agreements,
- declarations waiving the claims and
- shareholder resolutions.
According to the decision of FG Münster, the taxpayer bears responsibility for this inability to clarify the facts. The court therefore found no obstacle to derecognising the liabilities that remained unclear, thereby increasing taxable profit.
Correction through profit or loss or without affecting profit
Significance of the tax effects in previous years
According to the decision, whether an incorrect balance sheet item must be corrected through profit or loss or without affecting profit depends on whether it affected the amount of tax assessed in previous years for which the assessments had become final.
If the incorrect item had tax consequences, the correction must be recognised through profit or loss. If, by contrast, the item had no tax effect, it must be replaced without affecting profit in the opening balance sheet of the first assessment period that remains open to amendment, thereby departing from the formal balance sheet continuity principle.
Limits on retrospective balance sheet corrections
A balance sheet correction pursuant to § 4 Abs. 2 Satz 1 EStG is precluded to the extent that the relevant balance sheet forms the basis of a tax assessment that can no longer be revoked or amended. If a correction in the year in which the incorrect accounting treatment occurred is therefore not possible, the correction through profit or loss must be made retrospectively in the closing balance sheet of the first year in which an amendment with tax effect can be made.
General principles governing the burden of proof
Distinction between tax-increasing and tax-reducing circumstances
As a general rule, the Finanzamt (German tax office) bears the burden of proof for facts that result in higher tax. By contrast, if circumstances from which the taxpayer derives a reduction in tax cannot be clarified, the taxpayer bears the burden of proof.
In established practice, this issue has arisen in particular in connection with write-downs and write-ups to the going-concern value. If the factual requirements for a claimed write-down to the going-concern value cannot be established, the taxpayer bears the burden of proof in this respect under the general principles (BFH (Bundesfinanzhof, Federal Fiscal Court), judgment of 15 January 2019 – X R 34/17). The same applies to write-ups of liabilities to their going-concern value (BFH, judgment of 10 June 2021 – IV R 18/18).
Appeal pending before the Bundesfinanzhof
The legal issue relevant to the dispute has not yet been resolved by Germany’s highest fiscal court. An appeal on points of law against the judgment of FG Münster is pending before the Bundesfinanzhof under case no. IX R 8/26. The judgment has therefore not yet been finally upheld.
The appeal proceedings must clarify who bears the burden of proving whether a balance sheet correction pursuant to § 4 Abs. 2 Satz 1 EStG must be recognised through profit or loss or without affecting profit if the circumstances material to the decision can no longer be clarified. The Bundesfinanzhof will therefore have to rule on the scope of the principles adopted by FG Münster.
Tax law assessment by MTR Legal
The decision concerns the distinction between balance sheet corrections recognised through profit or loss and those made without affecting profit, as well as the allocation of the burden of proof in relation to liabilities that can no longer be substantiated. Companies, investors and high-net-worth individuals can have questions concerning the tax implications of balance sheet items and balance sheet corrections reviewed by MTR Legal Rechtsanwälte as part of its tax law advisory services.
