Taxation of Non-Interest-Bearing Purchase Price Installments

Taxation of Non-Interest-Bearing Purchase Price Installments

As part of anticipated succession, assets - such as real estate in particular - are often transferred to the next generation in return for long-term installment payments. The actual purchase price claim is therefore deferred for the long term - usually for more than one year - until a certain date under loan-like conditions. According to established case law of the German Federal Fiscal Court, in these cases the purchase price installments paid must therefore be broken down into a repayment and an interest component (see Section 12 (3) of the German Valuation Act (BewG)). The latter is subject to income tax as income from other capital claims (see Section 20 (1) No. 7 of the German Income Tax Act (EStG)). Questions of interpretation regarding the tax classification of non-interest-bearing installment payments are regularly clarified in fiscal court proceedings, as was done, for example, by the Cologne tax court in its ruling of October 27, 2022, case no. 7 K 2233/20.

In the case in question, parents had sold a property originally intended to be rented out to their son and daughter-in-law. The purchase price was to be paid in 258 monthly installments. In addition, a value protection clause was agreed, according to which the installments were to increase or decrease in line with the consumer index. The previous case law of the German Federal Fiscal Court regards the repayment of a debt by means of a long-term installment payment as the granting of a loan by the creditor. Accordingly, the tax office divided the purchase price installments into a repayment part and an interest part subject to income tax for the parents. The Cologne tax court took the same view.

Accordingly, this allocation applies even if the contracting parties had not agreed any interest or had even expressly excluded it. This is because such an agreement merely clarifies that interest may not be charged in addition to the total purchase price used to calculate the installment payments. Similarly, the agreement of a value protection clause is also irrelevant, as the division of the total purchase price into consideration and interest as payment for the use of capital is independent of the intention of the contracting parties. Furthermore, when determining the interest part, an interest rate of 5.5 % is generally to be assumed, unless the contracting parties have agreed a higher interest rate.

Furthermore, the Cologne tax court does not see any constitutional concerns in the fact that the transfer of the property is also seen as a gift tax transaction, which also led to the assessment of gift tax for the daughter-in-law. This is because the occurrence of taxable events of different individual taxes does not have to be coordinated with each other; consequently, the legislator does not necessarily have to avoid multiple taxation of the same facts. Furthermore, the tax reduction provided for in Section 35b EStG only covers inheritance tax and not gift tax situations.
 

Notice:

The Cologne tax court has allowed the appeal, which is being conducted at the German Federal Fiscal Court under case no. VIII R 1/23. Among other things, this will deal with the questions whether the interest rate of 5.5 % provided for discounting is correct against the background of the decision of the German Federal Constitutional Court of July 8, 2021 on full interest and whether a value protection clause precludes a division into interest and repayment parts. Similar situations should be kept open with reference to the pending proceedings before the German Federal Fiscal Court.