Requirements for Tax Reduction under Section 34 (3) of the German Income Tax Act (EStG)
Section 34 (3) of the Income Tax Act (EStG) grants taxpayers with extraordinary income – such as income resulting from the dissolution of certain reserves or in cases of compensation – a claim to tax relief through the application of a reduced tax rate. However, an essential aspect for granting this benefit is the statutory regulation allowing it to be claimed only once. In particular, where there are several extraordinary incomes within the assessment period, the law provides that the taxpayer selects the income to receive the preferential treatment.
Significance of an Explicit Application
There is a lack of consensus in administrative and fiscal court practice as to whether an explicit declaration of intent by the taxpayer is required, or whether the use of the tax benefit is already considered ‘consumed’ by the tax assessment itself. According to the wording of Section 34 (3) sentence 2 EStG, the taxpayer has the formal right to determine for which income the reduction is to be claimed. It remains controversial, however, whether this selection must be made actively by application, or whether mere practical application by the tax office is sufficient.
Decision of the Hamburg Fiscal Court on the Consequence of Consumption
In its ruling of 17 October 2024 (Case no.: 1 K 141/22), the Hamburg Fiscal Court addressed the question of whether the first application of the tax benefit—even without an explicit application by the taxpayer—constitutes its ‘consumption’ within the meaning of Section 34 (3) sentence 2 EStG. The case involved a situation in which the tax office granted the tax reduction for one type of income without an explicit request.
Key Statements of the Fiscal Judges
The court states that the consumption of the benefit occurs as soon as the tax office assesses the income tax using the reduced rate on the basis of extraordinary income and this assessment becomes final for the taxpayer—even if the taxpayer has made no explicit selection or has not submitted a specific application. With this final application, the tax benefit for the relevant period is considered to be irrevocably used up. A later request to assign the benefit to other income of the same assessment period or to change the allocation is then no longer provided for by law.
The fiscal court also points out that nothing in the law indicates that only an active application would be decisive for the consumption effect. Rather, what matters is the first final implementation of the tax benefit by the tax authority.
No Retention of Further Options
For practical purposes, this decision means that taxpayers who are granted the reduction under Section 34 (3) EStG by the tax office—even without a specific application—must consider this benefit as used. The option to later claim a ‘better’ allocation or to request that other extraordinary income within the same assessment period benefit from Section 34 (3) EStG is therefore excluded. This legal view is consistent with the legislative intent to expressly allow the tax reduction only once per assessment period for extraordinary income.
Consequences of the Proceedings – Note on Pending Legal Remedy
In this case, an appeal is pending before the Federal Fiscal Court (Case no.: VIII R 29/23). Taxpayers should therefore note that the decision of the Hamburg Fiscal Court is not yet final and that the outcome of the appeal proceedings is awaited. The presumption of innocence applies, and a final legal assessment depends on the highest court’s decision. Each case must always be assessed individually.
Individual Assistance with Issues Relating to Tax Reduction
The legal situation described and the court’s reasoning highlight the complexity of tax options and their consequences—especially in the context of extraordinary income. For companies, investors, or wealthy individuals facing individual circumstances, a case-by-case review of tax planning options is recommended. If you would like to have the tax implications in your case assessed, you can contact MTR Legal via the following link for reliable legal advice in tax law.
