Bad news for all corporations: According to a recent BFH ruling, the prohibition on deducting the trade tax burden from the assessment basis for corporate income tax is compatible with the German Basic Law (judgment of 16 January 2014, Az. I R 21/12). Background: Trade tax reduces commercial profit. It therefore constitutes a business expense in principle and should, in principle, also reduce the taxable profit of a corporation. However, under the 2008 Business Tax Reform Act, trade tax is no longer treated as a business expense by law. In the case at hand, a GmbH operating several petrol stations and incurring high trade tax payments due to substantial lease expenses brought an action against the tax deduction ban. The BFH, however, sees no breach of the principle of equal treatment and takes the view that the reduction of the corporate income tax rate from 25% to 15% under the Business Tax Reform Act provides sufficient relief for corporations.
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Frequently asked questions
Frequently asked questions
Is trade tax deductible as a business expense for corporations?
No. Since the Corporate Tax Reform Act 2008, trade tax (Gewerbesteuer) is no longer a deductible business expense by law. While it reduces profit under commercial law, it may not be deducted from the assessment base for corporate income tax when determining taxable profit.
Is the non-deductibility of trade tax constitutional?
Yes. The BFH ruled in its decision dated 16 January 2014 (Az. I R 21/12) that the non-deductibility is compatible with the German Basic Law. According to the BFH, there is no violation of the principle of equal treatment.
How does the BFH justify the constitutionality of the deduction prohibition?
The BFH refers to the reduction of the corporate income tax rate from 25% to 15% as part of the 2008 Corporate Tax Reform Act (Unternehmenssteuerreformgesetz). In the court's view, this rate cut provides sufficient relief for corporations and offsets the deduction prohibition.
What are the consequences of the ruling for lease-intensive corporations?
Corporations with high lease expenses – such as petrol station operators – continue to bear a substantial trade tax burden without being able to deduct it for tax purposes. In the case decided, an affected GmbH had unsuccessfully challenged the deduction prohibition.
Does trade tax reduce the commercial-law profit of a GmbH?
Yes, under commercial law, trade tax (Gewerbesteuer) qualifies as a profit-reducing business expense. For tax purposes, however, the deduction is disallowed for corporations, so the commercial balance sheet and tax balance sheet diverge on this point.