If a tenant bears the cost of installation or conversion work on a leased business building, these expenses may be capitalised and depreciated as part of the tenant's fixed assets, even though the building does not legally belong to them. In the following, we explain the requirements for such capitalisation in the tenant's fixed assets, the categories into which tenant installations and tenant conversions are divided, and their respective tax treatment.
Definition: Tenant Fixtures
Tenant fixtures and tenant conversions are construction measures that a person entitled to use the property carries out in their own name and for their own account on land belonging to a third party, provided these expenses do not constitute maintenance expenses (BMF circular: Income tax treatment of tenant fixtures and tenant conversions).
Tenant fixtures and tenant conversions can be classified into the following categories:
- Apparent Component (Scheinbestandteil)
Apparent components arise when assets are incorporated into a building by the tenant for a temporary purpose. According to the case law of the Bundesfinanzhof (BFH), a temporary purpose is assumed if:
- The ordinary useful life of the asset > actual useful life of the asset,
- based on all circumstances, it is to be expected that the incorporated item will later be removed, and
- the dismantled asset does not merely have scrap value but a residual market value appropriate to the circumstances (cf. BFH judgments of 24 November 1970 – BStBl 1971 II p. 157 and of 4 December 1970 – BStBl 1971 II p. 165).
If these conditions are met, a tenant fixture or tenant conversion can be regarded as an apparent component.
- Operating Equipment (Betriebsvorrichtungen)
Operating equipment does not serve the use of the building. It comprises devices of all kinds through which the tenant's trade is directly carried on (machine-like function). Examples include freight elevators, conveyor belts, working platforms, etc.
- Beneficial Ownership (other tenant fixtures and tenant conversions)
If the tenant's expenses constitute neither an apparent component nor operating equipment, they may still be capitalised as a tangible asset in the tenant's fixed assets if the tenant becomes the beneficial owner of the tenant fixtures or tenant conversions paid for. The tenant becomes the beneficial owner if the landlord's claim for restitution, which arises upon termination of the lease and also covers the assets acquired by the tenant, has no economic significance. Economic significance does not exist if:
- The incorporated item is technically or economically consumed during the expected term of the lease, or
- the tenant can expect at least reimbursement of the fair market value of the acquired asset upon termination of the lease.
- Particular Operational Use Benefit (other tenant fixtures and tenant conversions)
If the other categories are excluded and the tenant fixture or tenant conversion serves a particular operational or professional purpose of the tenant, these may likewise be capitalised as tangible assets within the fixed assets.
Legal Consequences and Depreciation Methods – Categories of Tenant Fixtures
- Apparent Components and Operating Equipment
Upon capitalisation, apparent components and operating equipment generally constitute movable assets within the fixed assets. Depreciation by the tenant is therefore possible either over the lease term or over the ordinary operational useful life pursuant to § 7 Abs. 1 and 2 EStG.
- Beneficial Ownership and Operational Use Benefit
Tenant fixtures and tenant conversions that can be allocated to the categories mentioned above regularly constitute immovable assets within the tenant's fixed assets. Depreciation is therefore possible either over the useful life of the building or in accordance with its ordinary operational useful life pursuant to § 7 Abs. 5a EStG.
Frequently asked questions
Frequently asked questions
What are tenant fit-outs and tenant conversions (Mietereinbauten and Mieterumbauten)?
Mietereinbauten and Mieterumbauten are construction measures that an authorized user (tenant) commissions in their own name and at their own expense on a third party's land or building, provided they do not merely constitute maintenance expenses. Under certain conditions, they can be capitalized and depreciated as fixed assets of the tenant, even though the building legally belongs to the landlord.
Into which categories are tenant fit-outs classified for tax purposes?
Tenant fit-outs are divided into four categories: temporary components (Scheinbestandteile), operating fixtures (Betriebsvorrichtungen), other fit-outs under the tenant's economic ownership, and other fit-outs with a specific business or professional use advantage. The classification determines whether the asset is movable or immovable and how depreciation is applied.
When does a tenant fixture qualify as a sham component (Scheinbestandteil)?
A sham component (Scheinbestandteil) exists when the tenant incorporates an asset into the building only for a temporary purpose. According to BFH case law, three conditions must be met: the ordinary useful life must exceed the actual useful life, removal must be expected based on the circumstances, and at the time of removal the asset must still have a fair value exceeding mere scrap value.
When does the tenant become the economic owner of a tenant fixture?
The tenant becomes the economic owner when the landlord's claim for return of the installed assets at the end of the lease no longer has any economic significance. This is the case if the installed item will be technically or economically consumed during the expected lease term, or if the tenant can expect at least reimbursement of the fair market value at the end of the lease.
How are the different types of tenant fixtures depreciated for tax purposes?
Sham components (Scheinbestandteile) and operating equipment (Betriebsvorrichtungen) are treated as movable assets and depreciated over the lease term or their standard useful life pursuant to § 7 Abs. 1 and 2 EStG. Tenant fixtures held in beneficial ownership, as well as those providing a specific operational benefit, are generally classified as immovable assets and depreciated over the useful life of the building or pursuant to § 7 Abs. 5a EStG.
What distinguishes an operating fixture from other tenant fit-outs?
An operating fixture (Betriebsvorrichtung) does not serve the use of the building itself but directly supports the tenant's business operations and performs a machine-like function, such as freight elevators, conveyor belts, or work platforms. Other tenant fit-outs, by contrast, serve the use of the building and are only capitalized if the tenant becomes the economic owner or if a specific operational benefit applies.