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Consultant, National Office Tax & Legal
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
If a taxpayer inevitably incurs greater expenses than the vast majority of comparable taxpayers (= extraordinary burden, agB), their income tax is reduced upon application in accordance with § 33 EStG. The tax relief is generally only available to those who have borne the agB. Irrespective of this, hidden profit distributions (vGA) in the form of saved expenses are treated, according to established case law, like an open distribution with an exchange of services customary between third parties. Consequently, the expenses saved as a result of a vGA must generally be taken into account by the shareholder as (notional) business expenses or income-related expenses.
In its decision of June 17, 2025 (case no. VI R 15/23), the Federal Fiscal Court clarified whether a vGA (special-purpose allowance) based on a reduced rent is also tax-deductible as an agB (general business expense) for the shareholder, insofar as it covers additional needs related to disability.
The majority shareholder and managing director of a limited liability company (GmbH) initially lived with his family, which included a severely disabled son, in one of two detached houses on a property owned by the GmbH, which he rented. In 2009, the limited liability company bore the costs for a connecting structure between the houses, which was adapted to the son's disability, and the necessary renovations. With effect from October 1, 2009, the parties to the lease agreed on only a slight increase in the monthly rent for house 1, even though the taxpayer and his family now occupied the entire converted and extended property. For the years 2011 to 2014, the taxpayer claimed a tax deduction for the “additional rent” resulting from the disability-friendly conversion of the houses as agB. The tax office only partially recognized this. In addition, it increased the taxpayer's income from business operations in each case following control notifications about agB from the GmbH to the taxpayer. The tax court agreed with this insofar as it allowed the additional rent due to the construction of the disabled-accessible connecting building between the houses as a tax-deductible agB. Furthermore, it classified the free transfer of house 2, in which the son's disabled-accessible sleeping area was located, as a hidden distribution of profits in the shareholder's income from business operations after applying the partial income procedure and refused a fictitious deduction as agB in this respect. The German Federal Fiscal Court (BFH) largely disagreed with this.
First, the Federal Fiscal Court, like the tax court, classifies the additional rent due to disability as a special allowance insofar as the expenses for the disability-friendly design of the living environment are deductible up to the amount of the additional costs that would have been incurred in the construction of the connecting building compared to conventional construction methods. This allows the construction costs that were unavoidable due to the son's disability and could not be avoided by the taxpayer to be distinguished from those that were merely the result of a freely influenceable decision depending on the taxpayer's taste, lifestyle, and financial possibilities. The additional costs incurred in adapting the private living environment to the needs of disabled persons are therefore only deductible to the extent that they do not exceed a reasonable amount. If this has to be estimated in individual cases, the BFH is of the opinion that this should not be done on the basis of a rigid average value, but may vary within a certain range. Only amounts exceeding the upper limit of this range are no longer considered to be solely and inevitably necessary as a result of the redesign of the private living environment due to illness and disability and are therefore no longer considered reasonable.
Furthermore, the BFH transfers the deductibility of a vGA in the form of saved (rental) expenses – in this case, the free use of the son's disabled-accessible bedroom in House 2 – to the shareholder as (notional) business expenses or income-related expenses in the case in dispute to the consideration of agB. With regard to the uniform concept of expenses, agB are equivalent to operating or special expenses or income-related expenses. Insofar as a vGA in the form of saved rental expenses is reclassified as income of the shareholder, these expenses must also be recognized as agB under the respective conditions. The tax court must now clarify in the second instance the amount of the hidden distribution of profits attributable to the son's use of the bedroom in House 2 due to his disability in the years in dispute.
Notice:
In its decision, the Federal Fiscal Court clarifies that the hidden distribution of profits triggered by the discounted transfer of the property converted for disabled access constitutes hidden distribution of profits within the scope of the shareholder-managing director's income generation. Following the reclassification of saved rental expenses as hidden distribution of profits, this is only logical and at the same time takes into account the mechanism of benefit compensation. According to this, taxpayers who have higher expenses due to agB should not be unduly disadvantaged.