Term and Definition of Transitory Items
Transitory items are a central concept in German tax and commercial law. They refer to amounts of money that are received or disbursed in the name and for the account of third parties and therefore do not belong to the assets of the company or taxpayer. In practice, this constellation frequently arises in the context of client relationships, fiduciary transactions, or for professional service providers, such as tax consulting and law firms.
Legal Classification
Transitory items are particularly important in tax law and accounting regulations. Their treatment is governed by various tax statutes and administrative regulations and is essential for the preparation of tax returns, bookkeeping, and the delineation of taxable consideration.
Tax Law Principles
The German Income Tax Act (EStG) and especially the Value Added Tax Act (UStG) differentiate between transitory items and actual sales or business income.
According to Section 10 (1) Sentence 6 of the UStG, amounts received or disbursed by an entrepreneur in the name and for the account of another constitute transitory items and not consideration for the entrepreneur’s own services. Similarly, income tax law stipulates that transitory items do not represent business income or expenses.
Accounting and Commercial Law Classification
From a commercial law perspective, according to the provisions of the German Commercial Code (HGB), transitory items are not to be booked as part of the company’s own sales revenue or operating expenses/income, but are to be shown in special accounts. They relate to the clearing account and the corresponding contra accounts for transitory funds.
Distinction from Similar Terms
Proper classification and treatment requires distinguishing between related terms.
Difference from Own Sales
Own sales are present if an entrepreneur acts in his own name and for his own account. Transitory items, by contrast, always exist when the company acts solely as a paying agent and accepts or transfers the amounts in the name and on behalf of a third party.
Difference from Expense Reimbursement
In contrast to genuine transitory items, certain expenses incurred by a company in its own name but for the account of a third party are often treated as expense reimbursements. As a rule, these constitute the company’s own expenses, even if they are reimbursed later.
Practical Examples of Transitory Items
- A tax advisor transfers wage taxes for a client’s employees directly to the tax office on behalf of the client.
- A real estate agent receives funds from buyers and sellers to forward and hold in trust.
- A notary collects real estate transfer tax and fees in his own name during a property transaction in order to forward them to the tax office or other authorities.
Essentially, the receiving party acts merely as a custodian and transfers the funds onward without any legal claim of their own.
Accounting Treatment of Transitory Items
In double-entry bookkeeping, transitory items are managed in separate accounts to distinguish them from the company’s own business transactions.
Chart of Accounts and Booking
In SKR03, this is usually account 1590 (Transitory Items), in SKR04 account 1370. A payment made for the account of third parties is booked as an outgoing entry, and a receipt as an incoming entry, in this account.
VAT Treatment
Since transitory items do not constitute consideration for own services (§ 10 Abs. 1 Satz 6 UStG), they are not subject to VAT. Therefore, incorrect is their inclusion in the VAT pre-declaration or as part of taxable sales.
Requirements for Qualification as a Transitory Item
In order for amounts to qualify as transitory items, the following requirements must be met:
- Third-party funds character: The amounts must be clearly received or disbursed for a third party from the outset.
- Third-party account character: The amounts must not be attributed to the business’s own assets.
- Action in someone else’s name and for someone else’s account.
If any of the preconditions are not met, the flow of funds must be treated as an operating sale (revenue) or an own expense.
Transitory Items in Tax Law
Income Tax
Transitory items are neither business income nor business expenses (§ 4 Abs. 3 Satz 2 EStG) – if handled correctly, they are not considered for tax purposes.
VAT
Transitory items, due to their nature, are not subject to VAT and are therefore disregarded when determining value added tax liability.
Trade Tax
Since no profit or loss is generated from transitory items, they have no impact on trade tax.
Case Law and Administrative Practice
The tax authorities and the courts (see, among others, BFH, judgment of 16.08.2001, V R 34/99) confirm that a strict distinction must be made between transitory items and own revenues. The decisive factor is always in whose name and for whose account the payment is received or disbursed.
Reporting Obligations and Transparency
Particularly in the case of holding large amounts of third-party funds, supplementary reporting obligations may arise, for example under the Anti-Money Laundering Act. Such items must also be transparently listed and documented on invoices and in accounting to avoid jeopardizing their recognition as transitory items for tax purposes.
Practical Issues in Differentiation
In practice, distinguishing between transitory items and expense reimbursements or own sales can be difficult, especially in the case of poorly documented or intermingled business transactions. A clear contractual arrangement and transparent bookkeeping are therefore of essential importance.
Conclusion
Transitory items are amounts of money received or disbursed exclusively in the name and for the account of third parties. From a tax perspective, they are disregarded for purposes of income tax, trade tax, and VAT, provided that all legal and accounting requirements are met. The correct handling of transitory items requires careful documentation, clear delineation, and proper bookkeeping to avoid misclassification and the resulting tax risks.
Frequently Asked Questions
When are funds considered transitory items from a legal perspective?
Funds are legally considered transitory items if, in the context of an activity, they are only temporarily received or disbursed and it is clearly recognizable that they do not belong to the handler’s own assets, but are managed or forwarded on behalf of a third party. According to Section 10 (1) Sentence 6 UStG, such funds are collected, for example, by tax advisors, lawyers, notaries, or other professionals to make certain payments attributable to the principal (e.g., court fees, taxes). The crucial factor is that the handler does not acquire any legal entitlement to the money and does not exercise economic power of disposal. Additionally, the payment transaction must be executed in the name and for the account of a clearly designated third party, which must be evident on invoices and payment records. If this distinction is missing or the funds are used for own purposes, legally speaking, there is no transitory item.
Who is liable under the law for losses or errors in relation to transitory items?
Liability in connection with transitory items is based on the general civil law principles of agency (§§ 662 et seq. BGB) as well as specific professional and criminal law regulations. Essentially, the recipient of the transitory item acts as a trustee or custodian for the third party. If losses arise from improper custody, incorrect forwarding, or mixing with own funds, the custodian is generally liable for damages resulting from this (including potential criminal liability under § 266 StGB – breach of trust). Delayed forwarding can also have liability consequences, especially if statutory or contractual deadlines are exceeded. If the recipient ignores all due care or disclosure obligations, this can also result in disciplinary sanctions.
How must transitory items be correctly presented and documented from a legal perspective?
The documentation requirements for transitory items are clearly regulated in commercial and tax law. According to § 4 Abs. 3 EStG and § 10 Abs. 1 Satz 6 UStG, transitory items must be clearly and unambiguously separated from own income and expenses. They must be reported separately in the cash book, business accounts, or bookkeeping and may not be offset against own sales, expenses, or income. Additionally, the principles of proper accounting (GoB) require that these amounts be traceable by means of supporting documents. On invoices, the transitory item must be shown separately as such, leaving no doubt as to the legal and economic affiliation with the principal. Violations of these declaration obligations can lead not only to tax risks but also to liability cases.
What are the tax consequences of incorrectly handled transitory items?
If transitory items are handled incorrectly for tax purposes, this can have serious consequences. Specifically, if transitory items are wrongly declared as own business income or recorded in the net income calculation, they can increase the tax base and lead to an unjustified tax burden. Conversely, the incorrect designation as a transitory item can result in tax evasion. In VAT law, there is a risk that VAT is not paid on actually taxable income or that unauthorized input tax deductions are claimed. If the tax authorities conduct an audit and transitory items are not recognized as such, this can lead to back taxes, fines, and potentially a procedure for tax evasion (§ 370 AO).
Who is legally entitled to handle transitory items?
Transitory items may only be handled by persons or companies engaged in fiduciary transactions or acting as agents for third parties. This includes, for example, professionals such as notaries, lawyers, tax advisors, administrators, commission agents, or even employers (e.g., in the remittance of wage tax for employees). It is legally necessary that the person acts in their own name but for the account of someone else, and that the economic benefit or burden of the fund transfer solely affects the third party. Merely incidental receipt and forwarding of funds without such a legal foundation does not constitute a transitory item within the meaning of the law.
What effect do judicial or administrative decisions have on existing transitory items?
Judicial or administrative decisions can have a direct impact on transitory items and their handling. For example, in the context of a declaratory action, a court can determine who is ultimately entitled to the transitory funds and when they are to be paid out. If an authority orders the withholding or attachment of transitory items (e.g., wage garnishment), the custodian is obligated to observe the legal requirements and to forward the relevant funds not to the original beneficiary, but as directed by the order. The custodian must document and comply with the decision in a legally secure manner to avoid liability or criminal risks (e.g., misappropriation).
