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According to the Bundesfinanzhof (BFH) – Germany’s Federal Fiscal Court – transferring a plot of land at a discount in the context of anticipated succession in return for annuity payments gives rise to taxable income from interest.
The scenario is not uncommon: the children get a plot of land along with a building within the framework of anticipated succession, whereas the parents receive monthly annuity payments. But beware: we at the commercial law firm MTR Rechtsanwälte note that the parents may accrue taxable income from interest under this arrangement.
Such were the circumstances in a case adjudicated by the Bundesfinanzhof on June 14, 2020 (Az.: VIII R 3/17). The plaintiffs – a jointly assessed married couple – had transferred a plot of land along with a house to their son and the wife in return for annuity payments in the amount 1,000 euros per month. The payments were to be made over a period of 30 years.
The tax authorities identified income from interest in connection with the annuity payments that it found was subject to income tax. The parents took legal action against this finding, arguing that the annuity payments ought not to be divided up into a repayment and an interest portion. They claimed to have deliberately transferred the property in return for low annuity payments over a long period of time, and thus ultimately below market value, in consideration of their son’s financial standing. In doing so, they were intentionally forgoing income for the financial benefit of their son and the wife. For this reason, the annuity payments did not include taxable income from interest.
Their claim was unsuccessful. The BFH found that this did not constitute a gratuitous transfer of inheritance. Notwithstanding the fact that the transfer had taken place at below market value, it still constituted a sales transaction that was subject to income tax.
The BFH went on to state that annuity payments from a sale-related annuity certain are to be divided up among the buyer and the seller into a repayment and an interest portion in accordance with section 13(1) of the German Valuation Act (Bewertungsgesetz, BewG), with the repayment portion equaling the present value of the basic pension entitlement, which is ascertained by discounting all outstanding instalments. The court held that the seller obtains taxable income from interest that amounts to the difference between the present value of the pension claim and the respective annuity payment. The BGH concluded that with the annuity payments in the relevant year amounting to 12,000 euros, the interest portion and the taxable interest income in this case was 9,420 euros.
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