The add-back provisions of the German Trade Tax Act are most likely not unconstitutional, the Bundesfinanzhof (BFH, Federal Fiscal Court) has ruled. Background: in its established case law, the Bundesverfassungsgericht (BVerfG, Federal Constitutional Court) refers to trade tax as an "earnings-oriented object tax" that continues to meet constitutional requirements. This assessment by the BVerfG had been called into question by the Finanzgericht (FG, Fiscal Court) in Hamburg. As justification, the FG cited, among other things, the add-back provisions for trade tax (interest payments) in force since 2008. In its view, this constituted a breach of the principle of taxation according to ability to pay. A final decision by the BVerfG is still pending. In its order of 16 October 2012 (Az. I B 128/12), the BFH recently ruled against a GmbH in a disputed case. The company operated a hotel that generated losses; only the add-back of debt-related payments, lease interest and licence fees resulted in a profit of EUR 9.6 million. This led to a considerable trade tax base amount of EUR 62 thousand. The BVerfG's decision remains open, as it is not pre-empted by the BFH's ruling; the latter may, however, serve as an indication of an unfavourable outcome for taxpayers. Read a current expert opinion on this topic here
Frequently asked questions
Frequently asked questions
Are the trade tax add-back provisions constitutional?
In its ruling of 16 October 2012 (Az. I B 128/12), the BFH held that the add-back provisions of the German Trade Tax Act are unlikely to be unconstitutional. The court relied on the established case law of the Federal Constitutional Court, which classifies trade tax as a constitutionally compliant 'earnings-based object tax'. A final decision by the BVerfG, however, is still pending.
Why did the Hamburg Tax Court consider the add-backs unconstitutional?
The Hamburg Tax Court regarded the add-back rules in force since 2008 – particularly for interest payments – as violating the principle of taxation according to ability to pay. It questioned whether the BVerfG's classification of trade tax as an object-based tax is still appropriate and referred the matter to the Federal Constitutional Court for clarification.
Which items are added back to profit for trade tax purposes?
Trade tax add-backs include, among others, interest on debt, lease payments and licensing fees. These items are partially added back to the profit from business operations, which means that even a commercial loss can result in a positive trade income and thus a trade tax liability.
What effects can the add-back have on loss-making companies?
In the case decided by the BFH, a hotel GmbH had generated operating losses. Only through the add-back of interest on debt, lease payments and licence fees did a trade income of approximately EUR 9.6 million arise, resulting in a trade tax base amount of EUR 62k. Loss-making businesses can therefore bear substantial trade tax burdens despite negative results.
What is the significance of the BFH ruling for the pending decision of the Federal Constitutional Court?
The BFH ruling does not anticipate the decision of the Federal Constitutional Court. However, it can be taken as an indication that the BVerfG is also likely to consider the add-back provisions as constitutional. Taxpayers should continue to keep affected assessments open until the BVerfG has issued its final decision.