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The Federal Constitutional Court has held that sec. 23 (3) no. 3 EStG unconstitutionally restricts the utilisation of losses from the rental of movable property (official court press release no. 116 of 23 October 1998 - DStR 1998, 1743). Income of the sort affected is of relatively minor importance because the statute refers only to rental of movable property which does not involve commercial business activity. Nevertheless, the grounds of the decision may be far-reaching.
The case involved a sailing yacht chartered out by its owner in the year 1984. A loss of DM 5,000 resulted from the charter agreement. Income from the rental of movable property can constitute commercial business income if the level of activity is intense enough to meet the requirements for a commercial activity.
Otherwise, it falls into the category of "other income" under sec. 23 (3) no. 3 EStG. This was the case in the matter decided by the court. Sec. 23 (3) no. 3 EStG provides that expenses for the purpose of earning income of this sort cannot be offset against income from other types of activity and cannot be deducted (carried backwards or forwards) under sec. 10d EStG. The tax authorities therefore refused to take the loss into consideration in calculating income tax owing.
After exhausting the chain of normal appeals, the taxpayer took his case to the Federal Constitutional Court, which decided in his favour. According to the sketchy press release, the court noted that the income tax law as a general matter allows losses in connection with taxable activities to be offset against other types of income in the year earned and, to the extent this is not possible, to be deducted from taxable income in prior or subsequent assessment periods (see sec. 1 of the article no. 148 for more detail). The court further noted that the income categories created by the income tax act were in principle equal in status. Discrimination against a particular type of taxable income might be warranted in special circumstances, the court stated. However, in the case of sec. 23 (3) no. 3 EStG, nothing in the legislative history indicated that any special considerations applied or were taken into account by the legislature when it enacted the statute. Under these circumstances, the provision was held to violate the principle of equality before the law (Art. 3 (1) of the German constitution) and therefore to be void.
The press release indicates that the court might not have ruled the same way had the statute merely limited deduction of losses from rental of movable property to profits from the same type of activity in other assessment periods.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.
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