Concept and general definition of expenses
Expenses are a central concept in German civil law and are especially broadly applied in the law of obligations, unjust enrichment, and property law. They refer to voluntary sacrifices of assets made for the purpose of a particular matter. Expenses are to be distinguished from expenditures, as the former always involve a reduction of assets that is connected to a specific person or object. The legal significance of expenses particularly arises from their distinction from the concept of damages as well as from their relevance for various legal bases of claims.
Statutory basis of expenses
Expenses in the Civil Code (BGB)
In the German Civil Code (BGB), the term ‘expenses’ appears in various provisions, in particular in §§ 670, 683, 684, 685, 687, 695, 697, and 994 et seq. BGB.
- § 670 BGB (Reimbursement of expenses):
In business management transactions without a contract (e.g., agency or agency without authority according to §§ 677 et seq. BGB), the agent or manager is entitled to reimbursement of expenses incurred for the execution of the transaction, to the extent those expenses were necessary.
- §§ 683, 684, 685 BGB (Agency without authority):
The manager may demand reimbursement for those expenses incurred for the purpose of managing the business, if they correspond to the interest and the actual or presumed will of the principal.
- §§ 994 et seq. BGB (Relationship between owner and possessor):
When a possessor returns an object to its owner, under certain circumstances, they may claim reimbursement for investments and expenses made, especially those that resulted in the preservation, improvement, or restoration of the object.
Expenses in tax law
In tax law, expenses are referred to as operating expenses or income-related expenses, insofar as they serve the acquisition, assurance, and maintenance of income (§ 4 para. 4, § 9 EStG). The concept of expenses should be interpreted economically and includes all outlays connected with the generation of taxable income.
Distinction: expenses, investments, and damages
An essential legal aspect consists in the precise differentiation of expenses from other, similarly situated concepts.
- Investments are specific expenses invested into an object, thereby maintaining or increasing its value (e.g., repairs to a house).
- Damage refers, in contrast, to the involuntary reduction of assets as a result of a harmful event.
Decisive for the classification as an expense is its voluntary nature, the direct link to the particular matter, and—especially in cases of reimbursement claims—the necessity of the measure.
Types of expenses and their legal treatment
Necessary and useful expenses
In property law, a distinction is made between necessary and useful expenses:
- Necessary expenses: These were required to maintain or protect the object (e.g., repairing a defective heater).
- Useful expenses: These do not constitute maintenance expenses, but increase the value or utility of the object (e.g., installation of an additional window).
This distinction is decisive for the question of whether and to what extent reimbursement of expenses may be claimed and whether special requirements for claims (possibly the owner’s consent for useful expenses) must be met.
Lost expenses
Actions incurring expenses that fail to achieve the expected result are referred to as lost expenses. In the context of expense reimbursement claims, these are also generally compensable, provided they were objectively required for the execution, even if they did not ultimately provide any benefit.
Assumed and own expenses
Another legally relevant aspect is the distinction between one’s own expenses and those incurred on the instructions of or in the interest of another (e.g., as part of an agency or agency without authority). Bearing expenses on behalf of others requires special legal bases for claims.
Requirements and scope of reimbursement of expenses
Requirements
A claim for reimbursement of expenses generally requires:
- Existence of a legal relationship (e.g., agency, agency without authority, possession constellations)
- Incurring voluntary sacrifices of assets for the purpose of the matter
- Necessity of the expense for the respective matter
- Interest and will of the opposing party (in cases of agency without authority)
Scope of reimbursement
The claim for reimbursement is limited to expenses that are necessary and reasonable. Reasonableness is assessed according to objective criteria. Luxury expenditures or excessive costs may be rejected as unnecessary. Loss of interest and lost profits are generally not considered reimbursable expenses, but may fall under damages.
Restrictions
Certain expenses are statutorily excluded from reimbursement, such as immoral, unlawful, or actions in violation of the law.
Practical significance and areas of application
Agency without authority (GoA)
In the context of GoA, the manager may demand reimbursement of expenses if these were made in the interest and the actual or presumed will of the principal. This promotes business-like action on behalf of another, but also allocates risk accordingly.
Possessory claims for investments
A bona fide or uncharged possessor may, upon restitution of an object, under certain circumstances assert a claim for investments (including useful ones) made on the object. The legal basis is §§ 994 et seq. BGB, which provide detailed regulations regarding the compensability of expenses.
Damages and expense reimbursement
In certain breaches of contract, in addition to the main claim for damages, the creditor is also entitled to reimbursement of wasted expenses (§§ 249 et seq. BGB), provided these were incurred in reliance on proper contract fulfillment and have become useless.
Summary and significance in legal practice
The concept of expenses in German civil and tax law is a multifaceted tool for determining the consequences of actions affecting assets done in the interest or on behalf of another. The differentiated approach according to type, necessity, and legal basis ensures a balanced consideration of protected interests and, especially through a clear distinction from damages, creates necessary legal certainty. Knowledge and understanding of this term are indispensable for the legally compliant handling of numerous claim scenarios in civil practice.
Frequently Asked Questions
How are expenses legally distinguished from expenditures?
In the legal context, particularly in accounting and tax law, the distinction between expenses and expenditures is of great importance. Expenses represent the entire consumption of value by a company within an accounting period, which leads to a reduction in equity capital, without necessarily involving an outflow of liquid assets. Expenditures, on the other hand, refer exclusively to the actual outflow of cash or cash equivalents. For example, an expense may arise when goods are withdrawn from inventory and consumed, even if no payment occurs at that moment. Conversely, an expenditure, such as settling an already recorded liability, may not generate any new expense at a later date, since the expense was already recognized upon receipt of goods or services. The German Commercial Code (HGB) and tax laws therefore require companies to provide clear documentation and proper allocation in their bookkeeping to avoid confusion and to ensure appropriate determination of profits for each period.
Are there legal requirements for recording expenses?
Yes, legal requirements for recording expenses are primarily found in the German Commercial Code (HGB), especially §§ 238 et seq. HGB, which govern bookkeeping obligations and the principles of proper accounting. Under § 252(1)(5) HGB, the realization principle and the principle of accrual accounting must be observed, which means that expenses must be recorded in the period in which they were economically incurred. Further regulations for corporations and certain partnerships apply, such as presentation and structuring requirements in §§ 266 and 275 HGB. For tax purposes, the Income Tax Act (EStG), in particular in the determination of profits via statement of assets or cash-basis accounting (§ 4 EStG), may contain different provisions regarding the recording and timing of expenses. These rules serve to ensure transparency and comparability in reporting and to prevent manipulation.
What types of expenses are legally distinguished?
Legally and for accounting purposes, various types of expenses are distinguished. Important categories are operating (business) and non-operating (neutral) expenses. Operating expenses arise from regular business activities, such as material, personnel, and depreciation expenses, and are used to determine operating results. Neutral expenses, on the other hand, are not directly related to the main business purpose and are further differentiated into extraordinary (e.g., losses from damages), non-operating (e.g., donations or expenses for leased real estate in a manufacturing business), and expenses relating to prior periods (e.g., retroactive payments from previous years). The key legal criteria are the intended purpose and allocation to the business activity, which especially affects tax treatment.
What legal consequences can incorrect recording of expenses have?
Incorrect or improper recording of expenses can have significant legal consequences. According to §§ 238 et seq. HGB, there is a legal obligation for proper accounting; violations may be prosecuted under § 283b StGB as tax or accounting offenses, such as balance sheet fraud or misrepresentation of the financial situation. Furthermore, in the case of incorrect or delayed recording, the tax office can make assessments or impose back payments and late surcharges. In serious cases, such as insolvency or criminal proceedings, improper accounting can result in civil and criminal liability of management. Additionally, if business expenses are not properly recorded, tax deductibility may be denied, leading to the refusal of tax refunds.
What record-keeping obligations exist for expenses?
According to statutory requirements for those subject to accounting and record-keeping, in particular § 257 HGB and § 147 of the Fiscal Code (AO), all documents evidencing expenses such as invoices, receipts, contracts, booking records, and other relevant evidence must be retained in an orderly manner. The minimum retention periods, depending on the type of document, are 6 or 10 years. For tax purposes, records must be kept so that a knowledgeable third party can understand and audit them at any time (GoBD – Principles for the Proper Keeping and Retention of Books, Records, and Documents in Electronic Form and for Data Access). A breach of these record-keeping obligations can lead to expenses not being recognized for tax purposes or to the tax authorities estimating the tax base.
Can all business expenses be claimed for tax purposes?
Not all business expenses are tax-deductible. Although the principle of authoritative valuation generally applies (§ 5 para. 1 EStG), there are numerous tax restrictions. For example, representation expenses, unreasonable entertainment costs (§ 4 para. 5 no. 2 EStG), fines, certain business expenses covered by § 4 para. 5 and § 5 EStG, or expenses of a private nature are not deductible. Furthermore, for some expenses, only partial deduction as business expenses is allowed (e.g., gifts to business partners are limited to 35 euros per recipient per year). The decisive factors are always the business purpose for incurring the expense and the reasonableness of the expense in relation to the business activity. The tax authorities check whether the expense is objectively business-related and whether all supporting evidence has been properly provided.
Are there special rules for the accrual of expenses over time?
With regard to the timing of expenses, German law primarily applies the principle of accrual accounting (§ 252(1)(5) HGB) and the rules on prepaid expenses (§ 250 HGB). Expenses must be assigned to the period in which they were economically incurred, regardless of the timing of payment. In the case of advance payments, prepaid expense items (assets or liabilities) must be recognized. Tax law follows similar rules, particularly with regard to balance sheet accounting. Under the cash-basis accounting method, however, expenses are generally recognized at the time of payment (the ‘outflow principle’, § 11 EStG); exceptions apply for regularly recurring payments made shortly before or after the end of the year, which are assigned to the appropriate period. These rules serve to ensure the most accurate possible determination of economic performance for the respective fiscal year.
