Extended reduction for co-letting of operating facilities

The so-called extended reduction of trade income pursuant to Section 9 No. 1 Sentence 2 German Income Trade Tax (Gewerbesteuergesetz, GewStG) is granted upon application to companies that exclusively manage and use their own real estate or capital assets and only engage in ancillary business activities that do not affect the reduction. The trade income attributable to property management is not subject to trade tax in this respect. The existing strict exclusivity requirements, according to which only certain other activities are permitted to a limited extent, lead to recurring disputes with the tax authorities due to their case-by-case consideration. 

So-called operating facilities are not considered real estate for valuation purposes; this also applies if the operating facility is permanently attached to the land or building. In such cases, the extended reduction in trade income linked to the mere management of real estate is excluded; the only exception to this is if the co-letting of operating facilities is considered a secondary activity that does not affect the tax benefit. In its decision of September 25, 2025 (case no. IV R 31/23), the German Federal Fiscal Court (BFH) had to decide on the requested extended reduction for the co-letting of an operating facility permanently attached to the property.

The plaintiff, a deemed commercial partnership (GmbH & Co. KG), was subject to trade tax on its asset management activities. It leased three properties, each of which was built on with a department store. One of the three department stores was equipped with a loading ramp, a passenger lift and a goods lift that was permanently attached to the building. Due to these co-leased operating facilities, the tax office denied the company the extended reduction. However, both the tax court and the BFH assessed the facts differently.

The passenger lifts and escalators in a department store are classified as part of the property and are therefore considered to be real estate assets; in the event of the dispute, this also applies to the loading bay. According to the highest court ruling, goods lifts, on the other hand, are classified as operating facilities, as they do not have a direct building function but rather fulfil an operational function of transporting the goods offered in the department store. However, if the rental of a goods lift is an essential/absolutely necessary part of the economically sensible management and use of one's own property, the granting of the operating facility is, in the opinion of the BFH, to be regarded as a secondary activity that does not affect the reduction, i.e. the co-rental is not detrimental to the reduction on the merits, but the income generated from it is not subject to the reduction itself. In this context, case law does not interpret the term ‘absolutely necessary’ so strictly that the rental of the operating equipment must be ‘without alternative’ or ‘the only conceivable option’; rather, it places the term ‘absolutely necessary’ in the context of ‘economically sensible property management and use’.
Furthermore, the co-rental of the goods lift at issue in the dispute is insignificant in quantitative terms, meaning that it does not exceed the limits of an insignificant ancillary business. In determining its scope, both courts based their assessment on the absolute amount of the acquisition and production costs of the freight lift (approx. EUR 20,000) as well as on the relationship to the total acquisition and production costs of the building (approx. EUR 2.6 million).

Furthermore, the business lease in question does not, exceptionally, have a negative impact on tax relief due to the extended reduction. In principle, the extended reduction does not apply to business leases, as assets other than the lessee's own property are usually (also) leased. In this case, however, according to the BFH, the co-lease of the business equipment does not preclude the extended reduction, as in addition to the transfer of the property – which is solely functionally essential – there is a secondary activity that is considered an absolutely necessary part of the economically sensible management and use of one's own property.

Given the lack of sufficient findings in the first instance, the BFH ultimately referred the case back to the tax court. The latter must now determine the share of the trade income attributable to the rental of the goods lift to arrive at an accurate loss deduction and loss carryforward assessment, as far as the GmbH & Co. KG has rented out a movable asset as part of a permitted but non-privileged activity. First, the positive trade income must be offset against a trade loss determined as of December 31 of the previous year. This means that a loss deduction is made even if the positive trade income is below the allowance for partnerships of EUR 24,500. However, the tax court incorrectly assumed that the loss is only considered after the allowance has been deducted and that the specific amount of the trade income is therefore irrelevant.

 

Notice: 

• The decision discussed here must be distinguished from a decision by the Fiscal Court Hamburg dated May 15, 2024 (case no. 2 K 76/22 rkr.), in which, in addition to a warehouse with a goods lift, a pallet conveyor system connected to the hall floor and the rear masonry was also leased. Since a technical expert determined that the use of the property as a warehouse would have been economically viable even without the pallet conveyor system that was installed later, the co-rental of the pallet conveyor system was classified as a harmful ancillary business in this case and the extended reduction was prohibited.
• The ruling was issued on the legal situation in the years 2016 to 2020. Since the 2021 assessment period, pursuant to Section 9 No. 1 Sentence 3 Letter c GewStG, income from direct contractual relationships with tenants of the property, such as from the leasing of operating facilities, is not harmful if this income does not exceed 5% of the income from the granting of the property in the financial year.