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Initial situation: Tax reduction under Section 35a of the German Income Tax Act (EStG) for work on owner-occupied living space
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Income tax may be reduced under certain conditions pursuant to Section 35a EStG if tradesmen’s services are performed within the spatial area of a domestic household. In practice, this regularly raises the delimitation question of whether a measure is to be classified as a favored “renovation, maintenance or modernization” – or whether it constitutes a non-favored new-construction measure. It is also decisive that the tax reduction is only available for labor costs (including the portions attributable to travel and machine costs), but not for material costs, and that payment is made cashless.
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BFH decision of 14 October 2024 (Ref. IX R 31/23)
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Subject matter of the proceedings
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The proceedings concerned the replacement of a heating system in an existing, owner-occupied residential building. The dispute was whether the tradesmen’s services invoiced for this were to be regarded as a favored measure under Section 35a EStG or whether the requirements for the tax reduction might not be met due to a – from the perspective of the tax authorities in comparable constellations discussed – proximity to production/manufacturing or new-construction measures.
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Core statement of the BFH
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In its decision of 14 October 2024 (IX R 31/23), the Federal Fiscal Court (BFH) confirmed in principle the tax reduction for the replacement of a heating system in an existing household. According to this, the replacement or renewal of a heating system may be classified as a modernization or maintenance measure and thus generally fall within the scope of application of Section 35a EStG, provided the other statutory and formal requirements are met.
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Distinction from the non-favored new-construction measure
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The BFH ties the classification as a favored tradesmen’s service to the character of the measure within an existing household. Renewing a heating system is typically aimed at preserving usability or modernizing the existing residential substance. This distinguishes such a measure from initial production work carried out as part of creating new living space, which Section 35a EStG is not intended to cover.
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Formal requirements and substantiation within the framework of Section 35a EStG
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Invoice and cashless payment
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To claim the tax reduction, Section 35a EStG requires, among other things, that a proper invoice is available and that payment is made to the service provider’s account. Cash payments are not favored. In addition, the invoice must allow for sufficient separation, because only labor costs including certain ancillary services are covered, whereas materials are not.
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Eligible place of performance: “in the household”
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The tradesmen’s service must be performed within the spatial area of the household. In the case of work on a heating system in an existing residential property, this requirement is regularly satisfied insofar as the service relates to the building and its supply systems.
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Significance of the decision for the tax classification of heating work
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Classification of typical work on existing properties
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The decision specifies the treatment of measures carried out on central technical installations of a residential building. The BFH emphasizes classification as a maintenance and modernization measure in existing buildings, which, for comparable cases, shifts the key points of review more strongly to the formal requirements (documentation, payment method, allocation of the invoice).
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Relationship to other tax provisions
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The tax reduction under Section 35a EStG exists in the context of other tax incentive and deduction provisions, whose requirements may differ from one another in individual cases. Which provision applies in the specific case depends on the actual circumstances and the tax classification of the measure.
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Assessment by MTR Legal
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The BFH decision of 14 October 2024 (IX R 31/23) illustrates that renewing a heating system in an existing household can generally be considered a favored tradesmen’s service under Section 35a EStG, provided the statutory requirements – in particular with regard to the invoice, the payment method and separable labor costs – are met. Anyone who has questions regarding the tax classification and the statutory system in connection with measures on existing properties will find a further point of contact for legal advice in tax law from MTR Legal.
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