German Federal Fiscal Court: Is a purchase option under a car leasing agreement an asset which may be withdrawn?

In its judgement dated 26 November 2014 (X R 20/12), the German Federal Fiscal Court (Bundesfinanzhof – BFH) denied a tax-privileged leasing arrangement recognition. In the specific case, a company (lessee) made leasing payments in respect of a car in an amount which, towards the end of the leasing agreement term, allowed the lessor to offer the car for sale to the lessee’s shareholder at a price far below the market value (grant of a purchase option).

The German Federal Fiscal Court considers a purchase option unilaterally granted by a lessor to a lessee at the end of a leasing agreement to be a business asset which may be withdrawn, provided that the leasing payments have previously been deducted by the lessee as business expenses (Betriebsausgaben). If the lessee’s shareholder accepts the offer as in the case in dispute, this results in a profit-increasing withdrawal at lessee level.

To remove any doubt regarding previous case law, the German Federal Fiscal Court decided in this context that the legal definition of an “asset” does not require that the asset is of use to the business for several years. It therefore does not conflict with the assumption of an asset that the period in which the options granted could be exercised may have been limited to the remaining term of the leasing agreements – i.e. a period of about one month in each case – and that the options were in fact exercised only a few days after being granted.

According to the Court, this already results from the wording of Sec. 7 (1) sent.1 of the German Income Tax Act (Einkommensteuergesetz – EstG) which states that the costs of acquisition or production of an "asset the use or utilization of which by a taxpayer for generating income generally covers a period of more than one year” have to be distributed over its useful life. This shows that there must also be assets the use or utilization of which by a taxpayer is limited to a period of less than one year.

The Court found that the period of usability is only of importance for the question of whether the costs of acquisition or production are immediately deductible as business expenses or have to be distributed over a minimum of two business years by way of a depreciation write-off. However, according to the Court, it is not part of the legal definition of an asset.