Lower Saxony Fiscal Court Comments on the Tax Consideration of Civil Litigation Costs
The Lower Saxony Fiscal Court (FG) in Hanover ruled on May 2, 2024 (Ref. 9 K 28/23) on the tax deductibility of expenses arising from a civil lawsuit as extraordinary burdens. The court represents a differentiated and current view that incorporates and develops parallel decisions of other fiscal courts. The issue is of significant relevance for the tax burden, particularly for wealthy individuals and entrepreneurs.
Legal Background: Civil Litigation Costs in Tax Law
Historical Development
Civil litigation costs are expenses incurred by a party related to conducting a legal dispute in civil law – such as for court, legal representation, or other cost items. The eligibility of these costs for tax consideration under “extraordinary burdens” according to § 33 of the Income Tax Act (EStG) has been subject to significant change in recent years. The previous recognition was significantly restricted by more restrictive administrative instructions and case law.
Current Legal Text
The law only privileges expenses if they inevitably arise and are extraordinary. According to the amendment introduced in 2013 in § 33 para. 2 sentence 4 EStG, civil litigation costs are generally excluded from deduction unless the taxpayer would have risked losing their existential foundations without these expenses. The interpretation of these vague legal terms is the subject of current case law.
Decision of the Lower Saxony Fiscal Court
Facts of the Case
In the case to be decided, the plaintiff bore the costs of a civil lawsuit in which he pursued a civil law dispute. In his tax return, he claimed these costs as extraordinary burdens, reducing his taxable income.
Judgment Rationale and Distinctions
The FG Hanover decided in favor of the taxpayer, contrary to the restrictive line of the tax authorities. The court states that the legislative intent and current law establish an exception which should be interpreted in the individual case, taking into account the existential significance of the legal dispute and the specific coercive situation of the taxpayer. It is not just the mere possibility of losing the lawsuit that is crucial, but rather whether the civil claim actually defends existential foundations such as the family subsistence minimum or necessary economic livelihood.
The court also considers recent case law of the Federal Fiscal Court (BFH), particularly regarding restrictive distinctions and rather holds an open, case-by-case examination of the necessity of legal costs to be indicated. As a result, the taxpayer was relieved of the expense determination for the disputed civil litigation costs.
Implications for Practice
The decision of the FG Hanover shows that cases of existential threat or massive interference with existential goods – such as labor law, family law, or property-securing proceedings – can continue to benefit from the possibility of deducting incurred civil litigation costs for tax purposes. The assessment is always case-dependent, and blanket rejection of tax consideration is unlawful.
Legal Situation in Light of Jurisprudence and Administrative Opinion
Divergences Between Jurisprudence and Tax Administration
The judgment again illustrates that there are divergences between administrative directives (e.g., application letters from the Federal Ministry of Finance) and the positions of the fiscal courts. While a strict standard is applied in administration, courts allow for a differing tax advantage when special circumstances are demonstrated.
Legal Remedies
Affected taxpayers should be aware that clarifying tax recognition in court involves uncertainties and the risk of differing final judgments by higher courts. The decision of the FG Hanover is not yet legally binding and can be reviewed by the BFH (as of 09/24/2024, source: urteile.news).
Outlook and Classification
Significance for Companies and Wealthy Individuals
For companies and wealthy individuals, who are often involved in complex civil disputes, the decision provides the possibility of realizing a tax advantage under certain conditions. Particularly, proceedings defending essential corporate foundations, basic economic living conditions, or non-deferrable interests may be considered after thorough examination.
Legislative Need for Adjustment
The current legal situation is not finally clarified. Future judgments of the Federal Fiscal Court, reactions from the tax administration, and potential legislative clarifications remain to be seen. Taxpayers are well-advised to evaluate their individual litigation costs in line with the latest developments.
For readers confronting questions about the tax treatment of litigation costs and their concrete effects on personal or business tax liabilities, contacting MTR Legal Attorneys at Law is an option to obtain legally sound guidance.
