Definition and Legal Classification of Business Expenses
Business expenses are costs that are incurred in the performance of a mandate or service, on behalf of or in the interest of a client or principal, by a service provider—often in the fields of legal and tax advice. These expenses are typically incurred in addition to the actual fees and represent reimbursable costs, provided they were necessary for the proper execution of the assignment.
Business expenses primarily arise in legal practice during client representation by legal service providers, but under general contract law can also be applied to service and work contracts. Legal grounds for the reimbursement of business expenses are provided by various bodies of law, in particular the German Civil Code (BGB) and specialized laws such as the German Attorney Remuneration Act (RVG).
Business Expenses under the German Civil Code (BGB)
Legal Nature and Bases for Claims
In the German Civil Code, business expenses are primarily governed under the law of agency (§§ 662 et seq. BGB) as well as the law governing service contracts (§ 611 et seq. BGB). Pursuant to § 670 BGB, an agent is entitled to reimbursement for expenses required to execute the commission, and which, in the given circumstances, he or she could deem necessary (so-called reimbursement of expenses).
Requirements for Expense Reimbursement
The following requirements must be met for asserting business expenses within the meaning of § 670 BGB:
- The expenses must have arisen in the context of an existing contractual relationship (e.g., mandate agreement, service contract).
- The expenses must be necessary (required and reasonable), and not simply useful.
- The expenses must have actually been incurred.
- The expenses must not already be covered by the agreed remuneration.
Necessity is determined by an objective standard, taking into account the options for judgment available to the entitlement holder at the time the expenses were incurred.
Business Expenses under the Attorney Remuneration Act (RVG)
General Provisions
The Attorney Remuneration Act (RVG) explicitly provides for the reimbursement of business expenses. According to § 675 BGB in conjunction with § 12 RVG, a legal service provider may claim reimbursement of expenses—especially business expenses—in addition to statutory or agreed remuneration.
Section 7 of the RVG fee schedule (VV RVG) conclusively regulates reimbursement of typical business expenses. The most important reimbursable items are listed under Nos. 7000 to 7008 VV RVG.
Types of Typical Business Expenses
Reimbursable business expenses include, among others:
- Postal and telecommunications services (§ 7002 VV RVG),
- Costs for copies and transcripts (§ 7000 VV RVG),
- Travel expenses and daily and overnight allowances (§§ 7003, 7005, 7006 VV RVG),
- Court fees, service of process fees, and costs for necessary third-party services (§ 7008 VV RVG).
Burden of Proof and Obligation to Provide Details
Business expenses must be substantiated individually and in detail if requested and explained in a comprehensible manner. Lump sums are only permissible to the extent provided for in the RVG (e.g., postal and telecommunication lump sum). Especially high or unusual expenses regularly require an itemized breakdown.
Business Expenses in Tax Law
Business Expenses as Operating Expenses
In tax law, business expenses—if caused by the operation—are regularly considered operating expenses within the meaning of § 4 (4) EStG. They thus reduce the taxable profit of the entrepreneur or service provider, provided a clear distinction is made between reimbursable third-party expenses and non-reimbursable personal expenses.
Treatment for VAT Purposes
In the context of VAT, business expenses are often considered as pass-through items according to § 10 (1) sentence 6 UStG, provided the service provider merely claims reimbursement for advanced third-party costs and they were incurred in the name of and for the account of the client. This requires proper agreement and invoicing in accordance with the relevant VAT regulations.
Distinction: Business Expenses, Disbursements, and Client Funds
Business Expenses vs. Disbursements
Not every expenditure related to the execution of an assignment qualifies as a business expense. It is particularly important to distinguish between expenses not made directly in the interest of another party and, therefore, not reimbursable.
Business Expenses vs. Client Funds
Client funds are monies that the service provider collects or manages for the client and holds in trust for them. In contrast, business expenses are initially paid by the service provider from their own funds and subsequently reclaimed from the client by way of reimbursement.
Procedural Aspects of Business Expenses
Reimbursement in Legal Proceedings
Business expenses enjoy statutory protection in procedural law, as they are part of the reimbursable costs of litigation under § 91 ZPO (Code of Civil Procedure). Claims are asserted within the cost-fixing proceeding. It is important to note that only necessary costs at a reasonable amount, and in accordance with relevant fee provisions, are reimbursable.
International Legal Comparison
Comparable rules regarding the reimbursement of business expenses can also be found in international contexts, for example, in Common Law as “disbursements” or in other continental European legal systems.
Final Remarks
Business expenses constitute an essential part of the cost structure in managing mandates, service provision, and procedural work. Accurate invoicing, strict observance of statutory provisions, and clear distinction from other types of costs are indispensable for legally secure management.
Sources and Further Reading:
- German Civil Code (BGB), in particular §§ 662 et seq., 670
- Law on the Remuneration of Attorneys (RVG) and Fee Schedule VV RVG
- Income Tax Act (EStG), especially § 4 (4)
- Value-Added Tax Act (UStG), especially § 10
- Code of Civil Procedure (ZPO), especially § 91
Frequently Asked Questions
What legal requirements must be met for business expenses to be recognized under German tax law?
For business expenses to be recognized for tax purposes, they must be incurred for business reasons; that is, they must be directly related to entrepreneurial activity (§ 4 (4) EStG). Every expenditure requires external documentation showing the reason and recipient of the payment. The expenses must also not be motivated by private or non-deductible reasons (e.g., personal living expenses pursuant to § 12 EStG). Proper documentation is particularly important: the document must contain the name and address of both the issuer and the recipient, as well as the exact date of service. Travel between home and workplace or representation expenses such as entertainment are only deductible to a limited extent or subject to additional proof requirements. If there is a lack of documentation or a missing business context, the tax authority may deny recognition.
What documentary obligations exist toward the tax authorities with regard to business expenses?
In principle, every business transaction must be documented with original receipts (invoices, receipts, contracts). Records must be kept for ten years (§ 147 AO). For electronically transmitted invoices, digital archiving according to GoBD is mandatory. Documentation must clearly indicate the amount, recipient, and purpose of the expenditure. For specific expenses, such as entertainment costs, additional details should be noted on the receipt: participants, occasion, place, and date. If these details are missing, the tax office may disallow or estimate the business expenses. Internal receipts are only accepted in exceptional cases and for low-value expenses if no third-party receipt is available.
What tax consequences may arise from incorrect accounting of business expenses?
Incorrectly booked business expenses can lead to significant tax disadvantages. If private costs are declared as business expenses or the business purpose is not substantiated, this may result in a reduction of deductions in a tax audit, leading to back taxes and possible interest charges (§ 233a AO). In the case of substantial sums or intent, there is also a risk of criminal tax proceedings for tax evasion under § 370 AO. The tax office may also levy a late filing surcharge (§ 152 AO) for errors not corrected in time and, in the case of repeated violations, may estimate the tax bases (§ 162 AO).
Which business expenses are explicitly excluded under German tax law?
German tax law explicitly excludes certain expenses from deduction as business expenses. According to § 4 (5) EStG, for example, costs for gifts to persons who are not employees may only be claimed up to a limit of 35 euros per recipient and year. Expenses for guesthouses, fines, penalties, regulatory fines, and similar sanctions are also not deductible. Typical representation expenses—such as costs for hunting, fishing, sailing or motor yachts, or social events—are likewise not recognized as business expenses. Living expenses, even if partly caused by business activities, are generally excluded pursuant to § 12 EStG.
How are mixed expenses with both private and business components treated legally?
For mixed expenses, i.e., costs that have both business and private character (e.g., use of a telephone for private and business calls), an appropriate and verifiable allocation must be made (§ 4 (5) sentence 1 no. 6b EStG). The business use must be estimated relative to private use and supported with documentation (such as call lists, invoices, usage records). Only the demonstrably business-related portion is deductible as a business expense. Without corresponding evidence, the tax authorities may disallow the business expense deduction in whole or in part.
Who is legally responsible for proper documentation and declaration of business expenses in a company?
The taxable entrepreneurs themselves are responsible, even if bookkeeping is outsourced to external service providers or tax advisors. The obligation to keep proper accounts is established in the Commercial Code (§§ 238 et seq. HGB) and the Fiscal Code (§§ 140 et seq. AO). Managing directors of a GmbH or the board of an AG are responsible for compliance and the submission of correct accounts, while in partnerships (e.g., GbR, OHG) or sole proprietorships, the respective owners or partners are liable. In the case of omissions, the tax office may impose, besides back taxes, fines or, in serious cases, even criminal sanctions.
What particularities apply to international business expenses from the perspective of German tax law?
International business expenses generally require special attention regarding their legal recognition. Travel expenses abroad must demonstrate that they were driven by business needs and were verifiably necessary. Foreign invoices must usually comply with the requirements of German VAT law (especially § 14 UStG). For foreign receipts, a translation is usually required, and the essential contents—such as service description, amount, issuer, and proof of payment in euros—must be comprehensible. For cross-border transactions with related entities, transfer pricing documentation requirements must also be met (§ 90 (3) AO). Lack of such evidence may lead to expenses not being recognized by the tax authorities.
