Background: The Federal Constitutional Court is currently examining whether the add-back of rents, leases and other interest when determining the trade tax base is unconstitutional (BVerfG, Az. 1 BvL 8/12). The German Retail Federation (HDE), together with the Association of Family Businesses (ASU), had already commissioned an expert opinion on this question. The result of this opinion is in favour of the taxpayers: the add-back provisions are unconstitutional. In the current press release dated 10 April 2013, the HDE quotes its CEO Stefan Genth as follows: "This confirms our view that the add-backs can lead to an unconstitutional over-taxation of companies. We cannot accept that companies are called upon to pay through the add-backs regardless of whether they actually make a profit." According to the HDE, the add-back weakens companies financially, making them more vulnerable to crises. The authors of the commissioned study consider the principle of equal treatment to be violated through a breach of the objective net principle. This principle states that only the balance of operating income and operating expenses may be taxed. Read another article here on the view of the BFH
Frequently asked questions
Frequently asked questions
What are trade tax add-backs for rents, leases and interest?
When calculating trade tax (Gewerbesteuer), certain expenses such as interest, rents and leases are proportionally added back to profits, thereby increasing the tax base. As a result, companies may have to pay trade tax even when they generate little or no profit. These add-backs are governed by § 8 GewStG.
Why do legal experts consider the trade tax add-backs unconstitutional?
A study commissioned by the HDE and the Association of Family Businesses (ASU) finds that the objective net principle is violated. Under this principle, only the balance between operating income and operating expenses may, as a rule, be taxed. Since the add-backs partially reverse deductible expenses, over-taxation can occur, which in the experts' view breaches the principle of equal treatment.
Which proceeding is pending before the Bundesverfassungsgericht (German Federal Constitutional Court) regarding the add-backs?
The proceeding with case reference 1 BvL 8/12 is pending before the Bundesverfassungsgericht. It examines whether the add-back of rents, leases, and other interest for trade tax purposes is compatible with the Grundgesetz (German Basic Law). A ruling could have significant implications for the trade tax burden of many companies.
What economic consequences do the add-backs have for businesses?
Because the add-backs apply regardless of actual profit, companies must pay trade tax even during loss-making periods. According to the Handelsverband Deutschland (HDE), this weakens liquidity and the equity base and makes companies more vulnerable to economic crises. Sectors with high rental or lease expenses, such as retail, are particularly affected.
Should affected companies keep their trade tax assessments open?
As long as the proceedings before the Bundesverfassungsgericht (Federal Constitutional Court) have not been decided, it is advisable to keep trade tax assessments open by filing an objection and requesting a suspension of the proceedings. This allows companies to benefit from a potential later decision in favor of taxpayers. Individual legal advice is recommended.