Trade Tax Add-Back of Water Use Charges

What were the facts of the case?

The claimant operated in the water supply and wastewater disposal sector in Brandenburg. Its business was based on a water-law utilisation permit authorising the extraction of groundwater, which had been granted in 1970 during the existence of the former German Democratic Republic (GDR).

Under section 40(1) of the Brandenburg Water Act (BbgWG), the claimant paid a water use charge calculated by reference to the actual volume of water extracted. During a tax audit, the tax office concluded that the charge constituted consideration for the licensing of a right and was therefore subject to trade tax add-back under section 8 no. 1 letter f) GewStG.

The claimant’s objection and subsequent action against the relevant trade tax assessment notice were unsuccessful. The Berlin-Brandenburg Fiscal Court (FG) held that the water-law utilisation permit constituted a public-law permit whose associated charge had to be added back for trade tax purposes.

How did the BFH rule?

The claimant’s appeal on points of law succeeded. The BFH set aside the Fiscal Court’s decision and referred the case back for further factual clarification. In particular, the Fiscal Court must now examine whether the disputed water use charge relates to a right within the meaning of section 8 no. 1 letter f) GewStG.

For tax purposes, the BFH clarified when a right exists that can give rise to add-back-relevant expenses. In the Court’s view, rights within the meaning of the provision are intangible assets with independent economic value that confer a right of use and place the holder in a protected legal position, including the ability to assert rights of defence against third parties. A mere opportunity to use something, without such rights of defence, is not sufficient.

Distinction under public law

From a public-law perspective, the BFH emphasised that a distinction must be drawn between a licence that confers rights of defence and a mere permit that does not. If, under the law of the former GDR, the utilisation permit at issue qualifies as such a right, the BFH considers the further requirements for a trade tax add-back to be satisfied as well.

According to the BFH, it is irrelevant that the amount of water use charge is determined by the actual quantity of water extracted. Even in that scenario, the charge may still be paid for the licensing of an assumed right. The Court also made clear that a transfer of rights for a limited period may exist even if, at the time the agreement is concluded, it is unclear whether and when that transfer will end.

The Berlin-Brandenburg Fiscal Court’s differing case law on water use charges under the Berlin Water Act did not alter that assessment in the present case.

Conclusion

As the BFH referred the dispute back to the Fiscal Court for further factual clarification, the final word on the trade tax add-back of water use charges has not yet been spoken. Nevertheless, the decision already shows that the relevant state-law provisions of water law are of central importance for the application of section 8 no. 1 letter f) GewStG. This is particularly evident from the differing decisions on Berlin and Brandenburg water law.

The judgment also raises fundamental questions about the scope of trade tax add-back in relation to public-law rights of use. Charges for licences, permits, easement rights and qualified easement rights (concessions) cannot be treated uniformly for trade tax purposes; instead, they must be assessed according to their respective legal nature. The further development of the case law in this area will therefore be followed with considerable interest.

If you have any questions about the judgment outlined above or about trade tax add-backs more generally, I would be pleased to assist you as your contact person.