No extended property reduction for harmful activities without income

Companies that are subject to trade tax solely because of their legal form, such as corporations and the typical GmbH & Co. KG, can apply for the so-called extended property reduction (Section 9 No. 1 Sentence 2ff German Trade Tax Act (Gewerbesteuergesetz; GewStG)) on the grounds of equal treatment with sole proprietorships and partnerships that engage in private asset management. Profits from the management and use of own real estate are then not subject to trade tax. The prerequisite is that the company exclusively manages and uses its own real estate or, in addition to its own real estate, its own capital assets, or that it also manages residential buildings or constructs and sells certain real estate. Other activities, in particular commercial activities, exclude the extended property reduction altogether as detrimental to the reduction. Ancillary activities are still within the scope of the exclusivity requirement and, in exceptional cases, do not affect tax relief if they serve the management and use of the company's own real estate in a narrower sense and can be regarded as an absolutely necessary part of the economically sensible management and use of the company's own real estate. 

In the case in question, a limited liability company (GmbH) had acquired classic cars as an investment in addition to property management and wanted to generate value increases in this respect. The GmbH did not consider the extended property reduction to be at risk because no ongoing income was generated from this secondary activity, i.e., the entire business income resulted solely from the preferential use of real estate.

The German Federal Fiscal Court contradicted this in its decision of July 24, 2025 (case no. III R 23/23). A secondary activity not expressly permitted in Section 9 No. 1 Sentence 2 ff. GewStG can also lead to the exclusion of the extended property reduction if no income is generated from it. A clear distinction must be made between the requirements for the extended property reduction on the one hand and the legal consequences on the other. The requirement is expressly based on the fact that only the activities specified in the law are carried out. Remuneration is not an additional criterion. The Federal Fiscal Court had previously left this fundamental question open and has now provided an important clarification that goes beyond the case in question. The distinction between the permissible or harmless activities specified in the law and other activities that are detrimental to the reduction is made purely based on the activity and not, for example, because of income. The acquisition and holding of assets not specified in the law – such as classic cars in this case – solely for the purpose of investment is not an expressly permitted activity.

This must be distinguished from the legal consequence of extended reduction. According to this, income resulting from the management and use of own real estate must be reduced. If no income is generated from a (permissible) activity, it cannot be reduced.


 

Notice: 

This ruling illustrates clearly that any activity that is detrimental to the reduction leads to the loss of the extended property reduction and that this cannot be “saved” by the fact that this detrimental activity is carried out free of charge. This underlines the fact that such cases require careful consultation. In the present case, the property reduction would have been granted if the harmful activity had been carried out in a separate (even identically owned) company.