In the case at hand, the claimant leased a snack bar including its operating assets effective 1 December 2017. After carrying out some preliminary renovation work, the business opened on 2 January 2018. The point in dispute with the tax office is whether the preliminary renovation costs incurred in December 2017 can be taken into account when calculating trade tax. From the tax office's perspective, these are costs of preparatory activities that cannot be considered for trade tax purposes.
Rheinland-Pfalz Tax Court Rules in Favour of Lease Commencement
In principle, the tax court agreed with the tax office's assessment. Costs of preparatory activities are not to be taken into account when determining trade income. This stands in contrast to income tax, where preparatory activities can indeed have a tax-reducing effect. In the present case, however, the Rheinland-Pfalz Tax Court ruled that § 2 Abs. 5 GewStG must be observed in this specific situation. § 2 Abs. 5 GewStG states that if the essential operating assets of a commercial enterprise are leased, this is treated as a fictitious new establishment. In more detail, this means that if the entire commercial enterprise is leased, it is deemed discontinued by the previous operator (§ 2 Abs. 5 S. 1 GewStG) and newly established by the lessee (§ 2 Abs. 5 GewStG). Since the claimant in the case at hand leased the entire snack bar business from the operator, § 2 Abs. 5 GewStG must be applied. As a result, the renovation costs incurred prior to the business opening can be taken into account in the trade tax calculation. It should further be noted that, due to the fictitious new establishment, participation in commercial activity can be assumed from the start of the lease. The tax office has already filed a duly admitted appeal, so the case will now be heard before the BFH. A decision is still pending.
Frequently asked questions
Frequently asked questions
Are renovation costs incurred before business commencement deductible for trade tax purposes?
As a rule, costs for preparatory activities incurred before business commencement are not taken into account when determining trade income. This distinguishes trade tax from income tax, where preparatory expenses can reduce the tax burden. However, an exception may apply in lease cases pursuant to § 2 Abs. 5 GewStG.
What is the significance of § 2 Abs. 5 GewStG when leasing a commercial business?
Under § 2 Abs. 5 GewStG, the lease of essential operating assets is treated as a cessation of the business by the former operator and as a new establishment by the lessee. This therefore constitutes a deemed new business formation. As a consequence of this fiction, the lessee participates in commercial activity from the start of the lease.
How did the Rheinland-Pfalz Tax Court rule on a lessee's renovation costs incurred before the opening of business?
The Rheinland-Pfalz Tax Court held that when an entire commercial business is leased (in this case, a snack bar), Section 2(5) GewStG applies and the lessee is treated as a fictitious new establishment. As a result, renovation costs incurred after the lease began but before the actual opening of business are deductible for trade tax purposes. Participation in commercial activity is deemed to commence from the start of the lease.
From when does the lessee of an entire commercial business participate in economic activity?
Due to the fiction of a new business formation under Section 2 (5) GewStG, the lessee participates in economic activity from the start of the lease, not only from the actual opening of operations. As a result, expenses incurred between the start of the lease and the opening can be relevant for trade tax purposes.
Is the ruling on renovation costs for leased businesses final?
No, the ruling by the FG Rheinland-Pfalz is not final. The tax office has filed an appeal with the BFH. A final decision by the highest court is still pending, so the legal situation in comparable cases remains uncertain.