Term and Definition of Third-Party Expenditure
The term third-party expenditure is significant in German law and is used in various areas of law, particularly in civil law, public law, and tax law. Third-party expenditure fundamentally refers to the use of money, labor, or resources by a person (third party) carried out for the benefit of another or at their instigation, without the third party being primarily legally obligated. A defining characteristic of third-party expenditure is that the expenditure is made not by the obligated or directly affected person, but by an external third party.
Fundamentals and Distinction
Third-party expenditure differs from foreign expenditure and own expenditure. While own expenditure is made by the affected person themselves and foreign expenditure usually arises within the framework of agency or engagement relationships, third-party expenditure occurs when the spending person is objectively and subjectively not considered an obligor or economically affected. A typical issue of distinction is whether the third-party expenditure occurs in one’s own (independent) interest or in the interests of another, and whether rights of recourse or claims for compensation arise.
Legal Classification of Third-Party Expenditure
Third-Party Expenditure in Civil Law
In civil law, third-party expenditure plays a central role in the application of regulations concerning reimbursement of expenses (see §§ 670, 683 BGB) as well as in civil law claims for damages. Third-party expenditure is particularly relevant when the costs or services of a third party subsequently have to be attributed to a party, for example in cases of management of the affairs of another or representation.
Application in the Management of Affairs Without Mandate
According to the regulations on management of affairs without mandate (GoA), expenses incurred by a third party in the interests of another can, under certain conditions, be claimed for reimbursement from that person. However, it is crucial that the third-party manager actually acts in the interest of the principal and with the intention of managing another’s affairs (§§ 683, 684 BGB).
Third-Party Expenditure in Tenancy and Contract for Work Law
In tenancy and contract for work law, third-party expenditure can arise, for example, if tenants or customers have essential repairs carried out not themselves but via third parties and later wish to claim reimbursement. Here, it is centrally important to what extent there is a concrete connection between the third-party expenditure and the contractual obligation.
Third-Party Expenditure in Public Law
In public law, third-party expenditure is encountered especially in law of costs and fees. Hier kann es vorkommen, dass Kosten von einem Dritten übernommen werden (z. B. bei behördlichen Maßnahmen), obwohl dieser nicht unmittelbar Adressat des Verwaltungsakts ist. Die Frage, ob und wie Drittaufwand anzurechnen oder zu erstatten ist, betrifft häufig die Anlastung öffentlich-rechtlicher Gebühren und Beiträge.
Third-Party Expenditure and Development Contributions
When levying development contributions under the Building Code (BauGB), the question regularly arises whether third-party expenses (e.g., by developers) are to be considered for the purposes of contribution assessment. There is nuanced case law on this, which states that third-party expenditure can only be credited against contributions if the third party gains no economic benefit and the expenditure served solely to fulfill public law obligations.
Third-Party Expenditure in Tax Law
In tax law, the treatment of third-party expenditure is significant for the determination of tax-related advantages or compensation. Third-party expenditure can play a role in the deduction of income-related expenses, business expenses, or special expenses.
Deductibility and Attribution of Third-Party Expenditure
Attribution for tax purposes is governed by the economic bearer principle: whoever actually bears the economic cost is generally entitled to claim it as a tax deduction. However, if the expense is borne by a third party, particularities must be observed. For example, the tax authorities generally do not recognize business or income-related expenses if the expenditure was covered in full by a person not related to the business. Special rules apply to special business expenses and special deductions.
Third-Party Expenditure in the Context of Third-Party Donation
A special case of application is the so-called third-party donation: If a third party incurs expenses in the interests of a tax-privileged organization, a donation receipt may be issued to the third party under certain conditions—provided that the expenditure was made voluntarily and without compensation.
Practical Examples and Case Law
Examples of Third-Party Expenditure
- A family member renovates a relative’s house at their own expense.
- A company pays for repair costs for property owned by another company.
- A neighbor hires a tradesman to renew a shared fence, even though the obligation under neighborhood law lies with the other neighbor.
Important Court Decisions on Third-Party Expenditure
Case law has elaborated on various aspects of third-party expenditure:
- BGH, Judgment of 7 July 1994 – III ZR 35/93: Recognition of third-party expenditure as reimbursable expenditure within the framework of management of affairs without mandate.
- BFH, Judgment of 20 June 2012 – X R 33/10: Tax consideration of third-party expenditure requires the taxpayer’s economic burden.
- OVG NRW, Decision of 21 February 2006 – 15 B 1175/05: On third-party expenditure in public fee law and its effects on contribution assessment.
Significance and Limits of Third-Party Expenditure
The legal assessment of third-party expenditure is crucial for numerous practical cases. It particularly concerns questions of the law of reimbursement of expenses, the attribution of costs under contracts, as well as the deductibility of expenses for tax purposes. Limits exist where third-party expenditure cannot be clearly attributed to the economically or legally favored party, or where there is neither legal nor economic burden.
Conclusion
Third-party expenditure is an important concept in German law, with diverse implications for civil, public, and tax law claims and benefits. Correct qualification and attribution of third-party expenditure always require careful examination of the specific circumstances to properly assess questions of liability, compensation claims, or entitlement to deductions. Its relevance arises particularly at the interface between legal obligation, economic interest, and actual expenditure by a third party for the benefit of another.
Frequently Asked Questions
Who is legally obligated to bear third-party expenditure?
In legal terms, the obligation to bear third-party expenditure largely depends on contractual agreements as well as statutory provisions. As a rule, when an entrepreneur is commissioned by a client, there is a distinction between own and third-party expenditure. If the entrepreneur has engaged third parties in their own name, they generally bear the cost risk and can pass these costs on to the client as part of their claim for remuneration, provided this has been agreed by contract. However, if it is a pure pass-through item, i.e., a pure reimbursement of costs, the client is obligated to assume the third-party expenditure. In case of doubt, the precise contract terms and the interpretation based on the intent of both parties are decisive. If there is no clear regulation, the general provisions of contract for work or agency law (§§ 631 ff., §§ 662 ff. BGB) apply, according to which the client regularly bears the expenses that are necessary and consistent with the contract’s purpose.
What legal requirements exist for showing third-party expenditure on invoices?
Legally, the correct disclosure of third-party expenditure on invoices is particularly important for transparency and tax treatment. Under § 14 UStG, the issuer of the invoice is required to list all services and associated costs clearly and comprehensibly. Third-party expenditures that qualify as pass-through funds (pass-through items) must be shown separately and explained, to ensure proper VAT treatment—as these are generally not subject to the service provider’s VAT liability. Inadequate separation can lead to tax disadvantages and liability risks. Certain professions, such as tax advisors or Rechtsanwalt, are required under their professional regulations (e.g., § 10 RVG for Rechtsanwalt) to properly designate and describe third-party expenditure.
To what extent can the client request proof or justification for third-party expenditures?
Under German law, the client has a comprehensive right to information about incurred third-party expenditures, especially when these costs are to be passed on. According to § 675 BGB (contract for the management of the affairs of another), there is an obligation to give an account and provide information to the client. The contractor is required to provide detailed evidence of the origin, necessity, and amount of third-party expenditure upon request—for instance, by submitting invoices from third parties or receipts from contracted service providers. If only a lump sum or an unexplained item is indicated, the client can refuse payment until proper disclosure is provided (§ 273 BGB, right of retention). The right to request evidence, however, only exists for actually incurred and justified third-party expenditures, not for general or calculated overhead costs.
Does the client have to pay third-party expenditure if it was not approved in advance?
The client’s legal obligation to assume third-party expenditure without prior approval is closely linked to the principle of necessity and appropriateness. According to § 670 BGB (reimbursement of expenses), the agent is only entitled to reimbursement of those expenses that were necessary to safeguard the client’s interests. If third-party services were commissioned without express consent or without contractual provisions, it must always be examined whether the costs were objectively necessary or prompted by a justified emergency. If such necessity is lacking or the client would likely have rejected the costs, the reimbursement claim may lapse. It is recommended to expressly agree on the cases in which prior approval is required and when third parties may be commissioned at one’s own discretion.
What liability risks exist in the event of incorrect onward charging of third-party expenditure?
Incorrect or improper onward charging of third-party expenditure can entail civil and, where applicable, criminal liability risks. Billing for unjustified or non-existent third-party expenditures may be considered fraud under § 263 StGB. In civil law, the client may have claims for reimbursement and damages, especially if it is proven that invalid or excessive amounts were charged. If third-party expenditure is incorrectly shown on invoices, problems with VAT disclosure can also lead to tax disadvantages: the tax office may deny deductible input tax or make additional demands on the service provider. Special regulations exist for professions with particular fiduciary duties, such as Rechtsanwalt or architects, who must expect professional consequences in the event of violations.
Are there differences in the treatment of third-party expenditure between different types of contracts?
Yes, from a legal perspective, the treatment of third-party expenditure differs depending on the type of contract. In contracts for work (§ 631 BGB), third-party expenditure is regularly part of the contractor’s scope of services unless the contract specifies a separate charge to the client. For agency or service contracts (§ 675 BGB), it is also necessary to distinguish whether passing on third-party expenditures is expressly or only implicitly stipulated. In tenancy law, especially for commercial leases, third-party expenditure may occur in the form of operating costs and, according to the Regulation on Operating Costs (BetrKV), is only chargeable if expressly agreed. In public procurement, additional specific rules apply, such as the requirements of cost-effectiveness and transparency when passing on external costs.
How long can claims for reimbursement of third-party expenditure be made?
The statute of limitations for claims related to third-party expenditure depends on the legal basis of the claim. As a rule, this is a claim for reimbursement of expenses pursuant to §§ 670, 675 BGB, for which the standard limitation period of three years under § 195 BGB applies. The period begins at the end of the year in which the claim arose and the creditor became aware of the circumstances giving rise to the claim or would have become aware of them without gross negligence (§ 199 BGB). If a contract for work context is involved, the limitation period usually begins with acceptance of the work, provided the reimbursement claim is based on it. It is important to check, however, whether the general terms and conditions (GTC) or individual contracts provide for different limitation periods or exclusion clauses.
