On the Extended Property Reduction

The income from a business is exempt from German trade tax if it results exclusively from the management and use of the business’s own real estate (so-called extended property reduction, Sec. 9 No. 1 Sentence 2 seq. of the German Trade Tax Act). However, if the real estate is used wholly or in part for the business of a shareholder or cooperative, the use of the extended property reduction is excluded according to the wording of the act. In practice, the criterion of “serving a shareholder” is extremely controversial, as also shown by the ruling of the German Federal Fiscal Court of June 29, 2022, Case No. III R 19/21.

In the case in question, a cooperative with a total of around 6,000 members rented out exclusively its own real estate, namely in the form of apartments and commercially used areas. One commercial tenant operated a retail business there, the profits of which were below the trade tax exemption amount of EUR 24,500. In order to be able to rent an apartment as well, that tenant acquired a cooperative share, which amounted to approximately 0.02 %; apart from that, there were no other commercial tenants participating as cooperatives. Following an external audit, the tax office refused to grant the extended property reduction requested by the cooperative, since its real estate had therefore also served the business of a cooperative. The German Federal Fiscal Court ultimately took the same view.

Even if the cooperative share of the tenant/cooperative renting the residential space was extremely small at around 0.02 %, the parallel renting of the commercially used space - this is the harmful service - means that the extended property reduction requested by the cooperative is not applicable. In the opinion of the German Federal Fiscal Court, it is irrelevant to what extent the shareholder or cooperative has an interest in the real estate enterprise; even a so-called dwarf share fulfills the exclusion. This is because a de minimis limit does not exist - due to the wording of the act (“if” and not “to the extent”) - and is also not required according to the constitutionally guaranteed principle of proportionality. Moreover, it is irrelevant that the cooperative only rented out an extremely small part of its real estate in a “harmful” manner.

It is also of no significance that the tenant/cooperative in the case in question was not subject to any trade tax liability in respect of its commercial activities due to the exemption regulation. This would have had to be assessed differently if the leased property had served a business of a shareholder or cooperative that was generally exempt from trade tax. However, the German Federal Fiscal Court does not consider the latter constellation to be transferable to the case in question. Otherwise, as a result of random fluctuations in the profits of the renting business, the real estate would, all other things being equal, serve the business of a shareholder or cooperative in some years, but not in others.


The fiscal court of first instance had ruled in favor of the cooperative. The German Federal Fiscal Court, on the other hand, applies extremely strict standards to the criterion of “serving a shareholder” and considers the legislator responsible for preventing such seemingly unfair results, e.g. by implementing a non-take-up limit for minor cases. However, a corresponding amendment to the German law is currently still completely open.