The reduced taxation of a capital gain pursuant to § 34, para. 3 of the German Income Tax Act (EStG) is granted to taxpayers who have reached the age of 55 or are permanently disabled from a occupational point of view according to social security law, upon application once in their lifetime. The application can be revoked without notice. This only applies, however, as long as the corresponding tax assessment is not formally and materially final. It is sufficient for the tax assessment notice to be partially "open", e.g. because it was amended on the basis of a correction provision.
It was disputed in the case decided by the BFH in its ruling of 20 April 2023, file no. III R 25/22, whether such an application can be withdrawn in the context of an objection against a notice of amendment. Namely, the capital gain had been reduced due to an external audit and the taxpayer therefore wanted to exercise the application again in another assessment period in a more tax-efficient manner.
The BFH confirmed the opinion of the tax office and the tax court FG (Fiscal Court) of Cologne, judgement of 9 March 2022, ref. no. 15 K 1055/20) and dismissed the application for withdrawal of the reduced taxation. The amendment of the option to claim reduced taxation of a capital gain pursuant to § 34 (3) EStG in the event of a partial interruption of the validity (in the case in dispute pursuant to § 175 (1) of the German Fiscal Code (AO) due to basic and subsequent notices) can only be considered if the associated tax consequences do not go beyond the framework set by § 351 (1) of the German Fiscal Code (AO) and § 177 of the German Fiscal Code (AO).
Pursuant to § 351 (1) AO, administrative acts that amend incontestable administrative acts may only be challenged to the extent that the amendment is within the scope of the amendment. In addition, the validity of the contested decision remains in force. This means that the amendment of the application or the exercise of the option is only possible if the tax change to be achieved thereby does not exceed the scope opened up by the - partial - interruption of the non-appealability. The changeability of a notice of amendment is therefore limited to the scope of the amendment. For amendments going beyond this, an independent correction provision is required, whereby the amendment of an application or option right does not itself constitute such an amendment. There are no other provisions in § 177 of the General Tax Code (AO). Paragraph 3 of this provision allows for the subsequent amendment of an exercised option, but only to the extent of the amendment. In the case of an amendment in favour of the taxpayer, it may not exceed the previous tax (§177(2) AO).
The amendment of a final tax assessment to a basic assessment only leads to an interruption of the validity and thus to an "opening" of the tax assessment in the amount of the amendment. The fact that the change in the capital gain, the decisive reason for the application for reduced taxation, was the reason for the change in the income tax assessment is, in the opinion of the Senate, irrelevant for the applicability of §§ 351 (1), 177 AO. In turn, there was no other independent rectification provision. In particular, the withdrawal of an application for reduced taxation does not constitute a so-called retroactive event.
Notice:
In practice, before an application for reduced taxation is submitted, consideration must not only be given to the disposal made in the assessment period. Likewise, possible later disposals by the taxpayer - if already assessable at the time - must be included in the consideration. In view of the legal purpose of § 34 (3) EStG, the BFH emphasises that the taxpayer knows his current income and can forecast his expected income better than anyone else. In this case, the taxpayer would also have to bear the risk of a possible misjudgement.