BFH changes case law on interest-free deferral of purchase prices

In purchase contracts for larger assets, a common problem is that buyers do not have the liquidity required to pay the entire purchase price immediately. It is possible to agree to defer the purchase price - possibly interest-free - and to amortize the purchase price claim in installments. In the case of interest-free deferred purchase price claims held in private assets, case law and the tax administration had until now treated each installment as containing hidden interest components that had to be taxed as investment income with income tax for the recipients.

With two decisions of March 24, 2026 (case no. VIII R 30/24 and case no. VIII R 1/23) the German Federal Fiscal Court (Bundesfinanzhof; BFH) now rejects such taxation and abandons its previous case law.

Facts of the case

In two independent cases, parents each sold a property to their adult child at an arm’s length purchase price. In each property purchase contract, it was agreed that the purchase price would not be due immediately, but would be deferred interest-free and repaid in installments over a long period (in one of the cases over 21.5 years).

In both cases, tax administrations assumed that the installments contained hidden interest components. At the time, this legal view could be supported both by earlier BFH case law and by the German Federal Finance Ministry circular of January 13, 1993 on the income tax treatment of anticipated succession. The tax offices determined the amount of the interest component in each case on the basis of Section 12 (3) of the German Valuation Act (Bewertungsgesetz; BewG): using the statutory interest rate of 5.5 %, they calculated the present value of all expected installments and treated the difference between present value and contractual purchase price as the interest component. The tax administrations then subjected this interest component, for the parents who received the installments, to income tax at the separate rate under Section 32d of the German Income Tax Act (Einkommensteuergesetz; EStG) by allocating it to their investment income under Section 20 (1) no. 7 EStG.

The Schleswig-Holstein Fiscal Court at first instance granted the action in one of the two cases after an unsuccessful objection, insofar as it did not view the interest components determined by the tax office as investment income taxable under Section 20 (1) no. 7 EStG. In the other case, however, the Cologne Fiscal Court at first instance dismissed the action with regard to the taxation of interest components as investment income.

Decision by the BFH

The BFH sided with the taxpayers in both cases. The receipt of the purchase price installments did not give rise to taxable income, neither income within the meaning of Section 22 (1) no. 1 EStG from annuity successional entitlements nor investment income within the meaning of Section 20 EStG.

A characterization as a life annuity is ruled out because the purchase price agreement lacks a risk component in the form of linking the payment of the annuity to the lifetime of the beneficiary.

Contrary to the tax administrations’ assessments, the taxpayers did not realize taxable remuneration for the provision of capital within the meaning of Section 20 (1) no. 7 EStG: this provision covers income from other capital claims of any kind not mentioned in the preceding enumeration of Section 20 (1) EStG, if repayment of the capital or remuneration for the provision of the capital for use has been promised or made. Such income is absent in the present cases because the contracting parties expressly agreed that each individual partial payment is to be applied in full to the purchase price and that the purchase price is to be deferred without consideration. Accordingly, these are merely purchase price installments and not taxable interest, for which Section 12 (3) BewG does not provide an adequate statutory basis.

Thus, the BFH abandons its previous case law: in the past, the BFH had assumed an interest component in each installment subject to taxation as investment income even when deferment was agreed to be without consideration.

The BFH does not exclude that - even after this change in case law - in individual cases remuneration for the provision of capital within the meaning of Section 20 (1) no. 7 EStG may nonetheless be present. To assess this, the content of the purchase price agreement must be examined. A taxable interest component in the purchase price installments is to be assumed in particular if the purchaser would have had to pay a lower amount by agreement in the event of immediate payment of the purchase price. This was not the case in the present facts.

Taxation in the form of realized changes in value (gains and losses) of other capital claims within the meaning of Section 20 (2) EStG also does not arise in the submitted cases: such a taxable gain beyond ongoing remuneration exists only if the payments made to satisfy the claim exceed the acquisition costs of the claim borne by the claimant. In the present cases, by contrast, the acquisition costs in the form of the purchase price correspond to the sum of all expected installment payments, so that the interest-free deferral of the purchase price could not result in a repayment gain under Section 20 (2) sentence 2 EStG.

Note:

This change in case law, regarding taxation, eases interest-free deferrals of purchase price claims. Partial taxation of purchase price installments as investment income is - at least where an interest-free installment payment is expressly agreed - now generally excluded. The judgments relate exclusively to purchase price claims held in private assets. However, the judgment should also apply to interest-free loans granted in the private sphere, e.g., to an asset-managing partnership.

The two judgments do not address purchase price claims held in business assets, as the facts did not provide any reason to do so.