Restriction of the extended deduction for real estate companies in a fiscal unity with subletting models: Analysis of the BFH ruling of October 16, 2024
With its judgment of October 16, 2024 (Case No. III R 41/22), the Federal Fiscal Court (BFH) made a fundamental decision regarding the tax treatment of real estate companies within a fiscal unity that operate under the so-called subletting model. The decision provides crucial clarification for participants in the real estate and corporate sectors concerning the requirements and limits of the extended deduction under Section 9 No. 1 Sentence 2 of the German Trade Tax Act (GewStG), which can have far-reaching implications for the tax structuring of corporate groups.
Background: The extended deduction under Section 9 No. 1 Sentence 2 GewStG
The extended deduction under Section 9 No. 1 Sentence 2 GewStG allows real estate companies to be exempt from taxation on certain trade tax income. The prerequisite is that the relevant company manages and uses only its own real property or, in addition, manages capital assets. This regulation is of particular importance as it is intended to mitigate tax disadvantages in the trade tax treatment of rental income from own real estate.
The fiscal unity and the subletting model
Basics of the fiscal unity
A fiscal unity in the tax sense exists when a legally independent subsidiary (subsidiary entity) is economically integrated into a parent company (parent entity). This relationship, which is particularly relevant for corporate income and trade tax purposes, is intended to represent an economic unit between parent and subsidiary companies.
The subletting model
The so-called subletting model describes a scenario in which a real estate company, acting as landlord within a fiscal unity, leases real estate to the parent entity, which in turn rents out the premises to third parties. The aim of such constellations may be to utilize tax planning opportunities and optimally allocate operating expenses.
BFH decision: No extended deduction in the described management model
In the case decided, a real estate company within a fiscal unity allowed the parent entity to use its property. The parent entity then sublet the premises to third-party businesses. The company applied for the extended deduction on its commercial income, arguing that it exclusively rented out its own property; this was rejected by the competent tax office and subsequently by the BFH.
Key findings of the judgment
The BFH clarified that the extended deduction can only be granted if the company in question directly lets the property to third parties for use. Leasing (subletting) to the parent entity, which realizes functional use only through further subletting, does not meet this requirement according to the BFH, even if the parent entity and subsidiary are part of a fiscal unity and the economic benefit is attributed to the parent entity.
Reasoning and implications
The Federal Fiscal Court justifies this position primarily with the wording and purpose of Section 9 No. 1 Sentence 2 GewStG. Even minor non property-related commercial activities or interposed entities in the letting process are, according to the highest court, sufficient to cause the requirements for the extended deduction to cease to apply. In particular, the interposition of the parent entity with its own rental discretion contradicts the concept of exclusive property management as established by case law. Decisive remains the direct transfer of use to external tenants and not to an affiliated company with its own rental authority.
Practical relevance and need for tax optimization
Changes for corporate structures
This decision has significant consequences for corporate groups and real estate companies seeking to optimize their group structures for tax efficiency. In particular, the attractive instrument of the extended deduction is not available within a fiscal unity when lease relationships are structured as in the subletting model.
Liability risks and structuring options
The steering effects of the decision should be taken into account in future corporate and tax planning of real estate structures within corporate groups. The case law makes it clear that, while structuring options exist, the threshold to covert commercial activity within the meaning of trade tax law can be quickly crossed once the direct transfer of use to third parties is interrupted.
Outlook and legal classification
The BFH ruling sets a clear accent in case law regarding the extended deduction regulations for real estate companies within corporate groups. Companies and investors are well advised to carefully analyze their existing and planned structures in light of this and to evaluate how new requirements might affect ongoing and future projects.
The proceedings also demonstrate that tax authorities and case law apply the provisions of the Trade Tax Act to real estate companies with great precision and scrutinize any exceeding of the legally defined limits very critically. Further proceedings regarding related constellations and structuring models may follow this approach and further specify the requirements.
If you require clarification regarding the trade tax treatment of group real estate as well as the requirements and limits of the extended deduction, the attorneys of MTR Legal Rechtsanwälte are available nationwide and internationally to assess current developments in trade tax law in the light of relevant case law and to examine individual questions.
Source: Judgment of the Federal Fiscal Court of 16.10.2024, Case No. III R 41/22
