Expanded Cutbacks on Trade Earnings for Subsidiary’s Property

Is the parent company eligible for an expanded cutback when leasing real estate to a share-holder pursuing a trade? The BFH passed its judgment on August 7, 2008 (re IV R 36/07, published on November 26, 2008).

A- GmbH and B- KG held all the shares of A- GmbH & Co Property KG (A- KG). B- KG also held all of A- KG’s property. A- KG purchased real estate and took over the lease with B- KG to this piece of land. When A- KG declared its trade tax for 1999 and 2000, it made use of the so-called “expanded cut back of the taxable income (erweiterte Kürzung des Gewerbeertrags)” for trade tax (§9 no. 1 cl. 2 GewStG). as a real estate company.

Normally, the cut of the trade income (Gewerbeertrag) for tradespersons with real estate is that the trade income is reduced by 1.2% of uniform value  (Einheitswert) of the real estate belonging to the company. Instead of this, those companies only managing and using their own real estate can apply for an expanded cutback. It consists of a cutback on that part of the income which is derived from their own real estate. ,

However, such a deduction is excluded when the property serves partially or in full one of the share-holders. The lawgiver considered it relevant that no other company is interposed because only then would this income be usually subject to taxation (so ruling case law of BFH). Real estate “serves” the trade of a shareholder e.g. this person uses it with a lease contract.

The tax office declined this cutback. The Tax Court denied the cutback. The Federal Tax Court denied the cutback. BFH held that a company is excluded from this rebate, when the property partially or in full belongs to the business of a share-holder. This is here the case because the A- KG is a share-holder of the A- GmbH hoping to make use of the deduction.