Paid waiver of usufructuary right

A usufruct gives the beneficiary the right to derive the corresponding benefits from an asset. Pursuant to supreme court rulings, usufructuary rights are assets for tax purposes. In addition, the usufructuary right granted free of charge is an intangible asset that can be contributed and withdrawn, meaning that it can be reallocated between private and business assets. However, pursuant to Section 1059 of the German Civil Code (BGB), usufructuary rights cannot be transferred to other persons; they either expire upon the death of the beneficiary or are cancelled by the beneficiary's unilateral release declaration.

In its judgement dated 12 December 2023 (case no. 6 K 2489/22 E), the Münster Fiscal Court (FG) ruled on the tax treatment of a usufructuary right to a property in the event of a paid waiver. In the course of an inheritance settlement in 2008, the plaintiff was granted the usufructuary right to a property, which it had rented out to a co-entrepreneurship of which it was the general partner since 2012. The usufructuary right, which was acquired free of charge and therefore could not be valued, was included in the plaintiff's special business assets at a value of EUR 0. After the plaintiff left the co-entrepreneurship, the usufructuary right was also transferred back to its private assets at zero value in 2018. The joint heirs, which owned the property, sold it, agreeing that the purchase price would be due when the usufructuary right expired. The plaintiff waived the latter in exchange for compensation in 2019.

As part of a tax audit carried out at the plaintiff's premises, the tax office classified the waiver of usufruct in return for payment as a private sale transaction within the meaning of Section 23 German Income Tax Act (EStG). The capital gain resulting from the waiver in the amount of the compensation received less the acquisition costs at the time of the withdrawal from the special business assets was subsequently subjected to taxation by the tax office.

Contrary to the opinion of the tax authorities, the Münster tax court ruled that the release of a usufructuary right does not constitute a sale, but merely a sale-like transaction, which is not covered by Section 23 EStG. Consequently, the waiver of the usufructuary right is not taxable. The court stated that, although there is no lack of compensation as a prerequisite for the existence of a sale, there was no change of legal entity in this case. The usufructuary right is not transferable by virtue of an explicit statutory provision and, according to the prevailing opinion, this also applies to the claim under the law of obligations to the granting of the usufruct. The transfer of the right of use due to the release of the usufruct alone is not decisive for the existence or non-existence of a sale. Rather, the asset ‘usufruct’ itself is decisive. This is because a usufruct merely confers a right of use and to benefit from - its substance is forfeited d upon release and not transferred.

Similar to the Federal Fiscal Court in its judgement of 10 November 2015 (case no. IX R 3/15), the Münster tax court assumes in its reasoning that the wording of Section 23 EStG is to be interpreted narrowly and not extended to transactions similar to sales. In contrast to the statutory provisions relating to income from capital assets, which since the 2008 corporate tax reform explicitly equate various substitute circumstances (e.g. irrecoverable capital claim) with a sale, Section 23 EStG continues to exclusively regulate the actual sale transaction. Consequently, the previous Federal Fiscal Court case law on a capital claim, which the tax office used as a basis for its arguments, is not applicable to private sales transactions from the point of view of the Fiscal Court.