The Federal Court of Finance (BFH) held in its decision of 23 July 2019 (IX R 28/18), that an expropriation of land is not to be classified as a private sale transaction within the meaning of § 23 EStG. If an expropriation does not make the person concerned very happy, the Federal Fiscal Court has now rejected the qualification by the tax authorities of compensation received in the course of expropriation proceedings as a capital gain.
What exactly had happened?
In 2005, the plaintiff had acquired an additional co-ownership share in an undeveloped property by bid acceptance in a forced sale. He thereby became the sole owner of the land. In 2008, the city in which the land plot was located carried out a special procedure for the separation of land and issued a special notice to the plaintiff concerning the land plot in accordance with the Act on the Separation of Land, which transferred ownership of the land plot to the city. In return, the plaintiff received compensation in the amount of €600,000.
The tax office regarded this as a sale transaction within the meaning of § 23 EStG and determined a capital gain in accordance with the inflow of the compensation payments. The action brought by the plaintiff against this was successful before the tax court.
The Federal Court of Finance has confirmed this decision of the tax court.
As it is well known, private sales transactions pursuant to § 23 para. 1 sentence 1 no. 1 EStG are, for example, sales transactions involving real estate, provided that the period between acquisition and sale does not exceed 10 years. However, the terms “acquisition” and “sale” are decisive here, as the Federal Court of Finance emphasises. These covered transactions of acquisition and transfer for consideration, where it depends to a large extent on the taxpayer’s will whether they come about.
The Federal Court of Finance (BFH) has consistently held that acquisition or disposal within the meaning of § 23 EStG means the acquisition and transfer of an asset to another person for consideration (see for example BFH ruling of 8 November 2017 – IX R 25/15).
The acquisition and transfer of the asset to another person for consideration must depend to a large extent on the will of the taxpayer and must therefore be an expression of economic activity. The Federal Court of Finance expressly emphasises this in its ruling.
By contrast, there is no such deliberate transfer to another person where – as in the present case of expropriation – the loss of ownership of the immovable property takes place without any significant influence on the part of the taxpayer, which means that it may also take place against the taxpayer’s will.
This interpretation, which is based on the wording of the relevant provision of Section 23 (1) sentence 1 no. 1 of the German Income Tax Act, is in line with the historical intention of the legislator. The provision in § 23 EStG that is the subject of the dispute goes back to the previous provision in §§ 41, 42 EStG as amended on 10 August 1925.
In addition, however, the BFH also cites systematic considerations.
While in the area of the tax recording of business income the transfer or encumbrance of the ownership of assets of the business assets can lead to the acceptance of a sale due to official or legal compulsion and thus to the tax consideration as business income, the taxation of private sales transactions within the meaning of § 23, Subsection 1, Sentence 1, No. 1 EStG is dogmatically dominated by the principle that there is no realization of profits. Rather, taxation here is based solely on the fact that the relevant asset is transferred to a third party for consideration with the taxpayer’s consent. These conditions were not met in the present case.
Relevance for practice:
The interpretation of the relevant provision of § 23, Subsection 1, Sentence 1, No. 1, EStG, which is based on many years of case law, also appears logical from a systematic point of view with regard to the above decision. The affirmative answer to a private sale transaction requires as a mandatory prerequisite a decision supported by the taxpayer’s will, so that the acceptance of a sale transaction within the meaning of § 23, Subsection 1, Sentence 1, No. 1, EStG cannot be “forced” on the taxpayer by the tax authorities.