Summary: Provision of infrastructure and advertisement activities by the landlord does not qualify as active trade or business.
German Federal Finance Court decision dated 14 July 2016 (Az. IV R 34/13)
The German Federal Finance Court (Bundesfinanzhof, “BFH”) overturned a ruling by the Finance Court of Lower Saxony dated 26 June 2013 with his decision published on 16 November 2016 which had raised questions regarding the current market standard for the lease and operation of shopping centers. The decision relates to a non-trading partnership (GmbH & Co. KG) which was the landlord and owner of a 30,000 sqm shopping center leased out to approximately 40 retail and service industry businesses. The landlord had contracted the operation of the shopping center to a management company which provided services like cleaning and security for the shopping center. Additionally, a center management company which was a member of the advertising association together with the shopping center’s tenants provided sales advertising and services.
The Finance Court of Lower Saxony had ruled and argued that the lease of the shopping center was an active trade or business due to the landlord providing a cluster of services from the tenants point of view which exceeded the limits for non-trading activities (private Vermögensverwaltung). The Finance Court had attributed the services of the management company, the center management company as well as the advertising association to the landlord/owner of the shopping center.
1. Decision by the BFH
The BFH has not followed the lower court’s reasoning. According to the BFH, the question of whether or not the limits for a non-trading activity are exceeded needs to be considered from an “asset-related” point of view. A non-trading activity shall accordingly be performed as long as the landlord’s services are considered common services in relation to the asset, i.e. services in common and widespread use.
In case of a shopping center, the BFH considers establishing an uniform environment for the tenants and shoppers to be a common service of the landlord. This includes common opening hours for the shops, providing entertainment and information for the customers as well as a consistent advertisement scheme for the whole shopping center. The common services of the landlord also include the provision of a minimum standard of infrastructure like parking places, storage space, access controls, sanitary facilities, etc. as well as the operation and maintenance of this infrastructure.
The common services of the landlord further include advertisement and sales activities of the landlord according to the BFH (without consideration of if these services are provided by the landlord himself or a third party contracted by the landlord). The advertisement and sales activities are primarily in the landlord’s interest.
As the services provided by the landlord, the contracted companies or the advertisement association respectively were considered common services by the BFH in the case at hand, the BFH was not required to rule on the question of whether or not the services performed by the contracted companies or the advertisement association could be allocated to the landlord as services directly provided by the landlord to the tenants.
2. Implications for current practice
The decision of the BFH confirms the widespread practice of lease of the shopping center by the owner and the provision of additional services like cleaning, security and organisation and management of an advertisement association by a center manager or similar service provider. There is thus no need for immediate action from this decision. The operation of a shopping center including the provision of additional services (advertisement, cleaning, security) by the landlord or a third party contracted by the landlord should not be considered an active trade or business and should not trigger any ongoing trade tax or trade tax in case of a sale of the property.
It remains to be seen if the German tax authorities accept this decision as universally valid and publish the decision in the Federal Tax Gazette (Bundessteuerblatt).
The BFH did not have to rule on the question whether additional services provided by the landlord or a party contracted by the landlord relating to a so-called food court could be considered common service.
In our opinion the BFH decision also does not completely clarify if the operation and short-term lease of parking places can be considered a non-trading activity or if the tax authorities can continue to qualify such activities as an active trade or business according to their guidelines. We recommend to continue having the operation and lease of parking places not to be done by the owner of the shopping center directly.