Distribution of Compensation for the Provision of Compensation Areas

The Federal Fiscal Court (BFH) confirms in its judgment of December 12, 2023, file number IX R 18/22, that for the possibility of distributing income for a usage provision of more than five years according to § 11 para. 1 sentence 3, para. 2 sentence 3 of the Income Tax Act (EStG), it is not necessarily required that the exact duration of the usage provision is contractually determined at the time of the prepayment. However, it is necessary that the duration can be determined, at least approximately, based on objective circumstances, possibly through estimation (cf. BFH judgment of June 4, 2019, file number VI R 34/17, Federal Tax Gazette II 2021, page 5).

Facts

The parties to the dispute debate whether the remuneration for providing agricultural land to compensate for interventions in nature should be taxed by the plaintiff either at the time of receipt or over a period of 20 years as income from leasing and renting.

The plaintiff and appellant (hereinafter "plaintiff") concluded a usage contract with ... GmbH (hereinafter "GmbH") on September 25, 2017. According to this contract, the plaintiff provides GmbH with agricultural land to carry out nature conservation measures and generate so-called eco-points. The usage contract was concluded for an indefinite period and could only be terminated ordinarily after 30 years (see § 3.2 of the usage contract). The right to extraordinary termination for good cause remained unaffected (see § 3.3 of the usage contract). Additionally, the plaintiff committed to ordering limited personal easements in favor of GmbH (§ 7.1 of the usage contract) and in favor of the competent authority (§ 7.3 of the usage contract). GmbH, in turn, committed to approving and applying for the deletion of the real rights entered in the land register at the end of the contract term (§ 7.6 of the usage contract).

The plaintiff received the compensation distributed over a period of five years. In his tax return, he claimed that according to § 11 para. 1 sentence 3 EStG, a distribution over 20 years should occur. The tax office (FA) did not consider the conditions for a distribution according to this provision to be met, as the duration of the usage contract was not sufficiently determined.

Reasons for the Decision

The BFH confirms the view of the FA. According to § 11 para. 1 sentence 3, para. 2 sentence 3 EStG, it is not required that the exact duration of the usage provision is contractually determined at the time of the prepayment. However, it is necessary that the duration can be determined, at least approximately, based on objective circumstances, possibly through estimation (cf. BFH judgment of June 4, 2019, file number VI R 34/17, Federal Tax Gazette II 2021, page 5).

In the present case, according to the findings of the Fiscal Court (FG), there is a usage provision duration of more than five years, as the possibility of ordinary termination of the contract was excluded for 30 years. However, there is a lack of a specific prepayment period. The law does not require that the exact duration of the usage provision is determined at the time of the prepayment (cf. BFH judgment of June 4, 2019, file number VI R 34/17, Federal Tax Gazette II 2021, page 5, para. 35). It is rather required, but also sufficient, that the prepayment period of more than five years can be determined based on objective circumstances, whether through estimation (BFH judgment of June 4, 2019, file number VI R 34/17, Federal Tax Gazette II 2021, page 5, para. 35; see also Federal Ministry of Finance, letter of September 30, 2013, Federal Tax Gazette I 2013, page 1184, para. 26; BFH judgment of July 20, 2018, file number IX R 3/18, HFR 2019, page 126, para. 23).

In the present case, the BFH does not consider this to be given. Although in the case of dispute, a minimum usage period is established due to the exclusion of ordinary termination for 30 years, there are no objective indications to determine the end of the usage provision or the prepayment period, whether through estimation or otherwise.

Note:

The tax administration allows the distribution of compensation payments in the context of power grid expansion over a minimum period of 25 years (see Ministry of Finance Schleswig-Holstein, letter of May 23, 2023, file number VI 309-2134-080; Income Tax Brief Information No. 2023/3).

We at EGIDO are pleased to assist you in working out the legal consequences of the decision for you and coordinating possible courses of action.