Germany: Option Premiums Received - Finance Ministry Decree

The finance ministry has issued a decree accepting a Supreme Tax Court case of December 2002 calling for option premiums to be deferred as income until option exercise or expiry.

In December 2002, the Supreme Tax Court held that the option fee received by the grantor of an option (call or put) should not be taken to income until realised. Realisation was the exercise or expiry of the option, as only then had the grantor fulfilled his contractual obligations. The Court specifically pointed out that the obligation to honour the option remained undiminished throughout its term. There were therefore no grounds for apportioning the premium over time or for treating the risk of loss as a "threatened" loss from a contract "in suspense". Rather, the grantor had not yet completed his performance and - given that the option would only be exercised to the advantage of the holder - he should necessarily provide for a liability in the amount of the premium. The premium was the option's acquisition cost and, in the circumstances of the case, there were no concrete grounds for anticipating a further expense under the "lower of cost or market" rule.

On February 9, 2004 the ministry of finance published a decree back-dated to January 12, 2004 stating that "the principles of the case are to be followed". The ministry then goes on to say that any anticipated loss over and above the premium received should be treated as a "threatened loss from contracts in suspense". However, no provision for any such contingency may be taken up with tax effect after 1996 following a change in the law from that applicable to the case decided.