Add-backs for trade tax purposes for the temporary transfer of rights

Add-backs and deductions under the Trade Tax Act (sections 8 and 9 of the Trade Tax Act)

In most cases, trade tax is the most significant type of income tax for corporations. Due to the planned increase in the statutory minimum tax rate to 280 percent (section 16(4) sentence 2 of the Trade Tax Act) and the gradual reduction of the statutory corporate income tax rate (section 23(1) of the Corporate Income Tax Act) to 10 percent, it is becoming even more significant. In substantive law, determination of income for trade tax purposes starts with the income and corporate tax definition of “profit from business operations” (“first calculation step”, Federal Fiscal Court judgement of 23 Nov 2021, file ref. I R 5/18, para. 17), even though this has no procedurally binding effect (Federal Fiscal Court judgement of 28 May 2020, file ref. IV R 17/17, Federal Tax Gazette [Bundessteuerblatt–BStBl] II 2023, p. 607, para. 21). Through “elements typical of taxes on assets,” this initial figure is “modified into a trade income amount,” particularly by applying the add-backs and deductions under sections 8 and 9 of the Trade Tax Act (“second calculation step”, Federal Fiscal Court judgement of 23 Nov 2021, file ref. I R 5/18, para. 17).

Implementing the nature of the trade tax as a tax on a certain object means that the business operation as the taxable object is to be “assessed based on its own earning capacity, without regard to the personal characteristics of the taxpayer and their personal relationship to the taxable object” (Federal Fiscal Court judgement of 1 Sep 2021, file ref. III R 20/19, Federal Tax Gazette II 2022, p. 83, para. 21). For this purpose, add-backs (as “partial prohibitions on deduction,” Federal Fiscal Court judgement of 7 Jul 2004, file ref. XI R 65/03, Federal Tax Gazette II 2005, p. 102) and deductions under sections 8 and 9 of the Trade Tax Act are applied (Federal Fiscal Court judgement of 7 Feb 2024, file ref. I R 36/23 (I R 5/18), Beck RS 2024, 13115). As “restrictions on the deduction of business expenses” in disguise (Federal Fiscal Court judgement of 4 Jun 2014, file ref. I R 21/13, Federal Tax Gazette II 2015, p. 293, para. 12) or exemptions in disguise, these follow several objectives.

One of these is the implementation of neutrality with regard to financing: trade tax should apply only to the business as such, regardless of its relationship to a specific legal entity (Federal Fiscal Court judgement of 26 Mar 2015, file ref. IV R 3/12, Federal Tax Gazette II 2016, p. 553, para. 20). One of the purposes of the add-backs is to determine the trade income relevant for taxation regardless of how the business is financed. The legal reference point is thus a “typical” equity-financed business (Federal Fiscal Court judgement of 4 Jun 2014, file ref. I R 70/12, Federal Tax Gazette II 2015, p. 289, para. 13).

Add-backs under section 8 no. 1 of the Trade Tax Act for interest and interest-like payments

According to the introductory sentence to section 8 of the Trade Tax Act, add-backs under that section are always made only to the extent that payments have been deducted in determining profit. Add-backs under section 8 no. 1 for interest and interest-like expenses are particularly prominent. These are first aggregated into a total under (a) to (f) of section 8 no. 1, from which an allowance of EUR 200,000 is deducted. One quarter of the result is then added back to the income, resulting in “partial prohibitions on deduction” (Federal Fiscal Court judgement of 7 Jul 2004, file ref. XI R 65/03, Federal Tax Gazette II 2005, p. 102) for trade tax purposes.

A quarter of the total under section 8 no. 1 must include expenses for the temporary transfer of rights, particularly license fees (section 8 no. 1 (f) of the Trade Tax Act). In contrast to other letters under no. 1 of section 8, where a mere pass-through of the corresponding expenses may lead to an add-back (e.g., Federal Fiscal Court judgement of 14 Jun 2018, file ref. III R 35/15, Federal Tax Gazette II 2018, p. 662), section 8 no. 1 (f) contains an exception in its first sentence (“with the exception of licences that exclusively entitle the holder to transfer rights derived therefrom to third parties”; Federal Fiscal Court judgement of 29 Jun 2022, file ref. III R 2/21, para. 26 and following). 

The fourth chamber of the Federal Fiscal Court has now had to rule on section 8 no. 1 (f) of the Trade Tax Act in the context of the inclusion of fees for water abstraction rights (file ref. IV R 26/23). It had previously held in established case law that “rights within the meaning of section 8 no. 1 (f) sentence 1 of the Trade Tax Act … are intangible property rights, i.e., subjective rights in intangible assets with an independent economic value that include a right to use and in respect of which a protected legal position – a right of defence – exists” (Federal Fiscal Court judgement of 23 Feb 2023, file ref. IV R 37/18, Federal Tax Gazette II 2023, p. 91, para. 33; Circular of the higher tax authorities of the federal states of 2 Jul 2012, Federal Tax Gazette I 2012, p. 654, para. 33). 

Application of established Federal Fiscal Court case law to a fee for water abstraction rights

Furthermore, according to the wording of the Act, the rights must have been “granted for a limited period of time”. In established case law the Federal Fiscal Court has ruled that at the time the contract is concluded, it may still be uncertain whether and when the grant of rights will end. On the other hand, economic ownership of the underlying right (section 39(2) no. 1 of the Fiscal Code [Abgabenordnung-AO]) may not have been transferred (Federal Fiscal Court judgement of 23 Feb 2023, file ref. IV R 37/18, Federal Tax Gazette II 2023, p. 91, para. 50, “exhaustive transfer of rights”). 

The Federal Fiscal Court particularly had doubts whether a “right” within the meaning of section 8 no. 1 (f) sentence 1 of the Trade Tax Act existed in the case at hand. Since the underlying concession was based on old GDR law dating from 1970, the Federal Fiscal Court could not review it in its entirety (see most recently Federal Fiscal Court judgement of 30 Oct 2025, file ref. X R 28/22, para. 31 and following). Therefore, the fiscal court must go back and make the necessary findings at second instance. In similar cases, it is therefore worthwhile to thoroughly review the legal situation in fiscal court proceedings, as the Federal Fiscal Court cannot do this itself (section 118 of the Fiscal Court Act ([Finanzgerichtsordnung–FGO]).