Brief overview
A GmbH, the owner of a residential complex in typical GDR prefabricated construction, had the useful life of the building estimated by an expert to be significantly lower (25 instead of 50 years) and thus doubled the annual depreciation rate from 2 to 4 percent.
The tax office questioned this approach, adjusted the tax assessments following a tax audit and rejected the different useful life.
Before the Mecklenburg-Vorpommern Fiscal Court, the plaintiff prevailed in full: The court accepted the shortened useful life, based on a combination of technical wear and tear, economic depreciation and legal framework conditions.
The ruling is one of the earliest decisions to explicitly address the BMF circular of 22.02.2023 and assess its restrictive requirements for the verification method as incompatible with BFH case law on the freedom of choice of presentation.
Initial situation: Depreciation at 4 percent The plaintiff GmbH acquired an eleven-storey prefabricated residential complex built in 1980 in 2006. In the years before and after, various modernizations and repairs were carried out, including
1991: thermostatic valves and distributors
1992: new front doors
1995: renewal of the elevators
1997: Fire protection measures
1998: Painting work in the stairwells
2000: Refurbishment of the building (renewal of cold, hot and circulating water pipes, some electrical and sanitary installations)
2003: New roofing of the north roof, partial window renovation
2011: Façade renovation and replacement of the remaining windows
As at 30.11.2006, 210 of the 327 apartments were rented out; there were also two rented commercial units.
Appraisal basis: shorter useful life The company had an appraisal report prepared by TÜV (mortgage lending value and market value). The appraisal derived a remaining useful life of 14 years from the structural condition; 30 years would be achievable with conversion and modernization. A current actual total useful life of 25 years was derived from this. On this basis, the GmbH applied an annual depreciation of 4 percent instead of 2 percent. With acquisition costs of EUR 4,173,987.63, this resulted in depreciation of EUR 166,959.50 per year.
Audit and objections from the tax authorities In the course of a tax audit (2011-2013, years in dispute 2006-2008), the auditor questioned the remaining useful life. In particular, it was criticized that the total useful life of 40 years for prefabricated buildings assumed in the expert opinion for the renovated condition was not comprehensibly substantiated. The auditor therefore rejected the increased depreciation and demanded the standardized depreciation of 2 percent in accordance with § 7 para. 4 sentence 1 no. 2b EStG, as sufficient evidence in accordance with § 7 para. 4 sentence 2 EStG had not been provided. The Dresden Süd tax office then issued amended assessments (including corporation tax loss carryforward, trade tax assessment amount, trade loss that could be carried forward). The GmbH lodged an objection.
Argumentation of the plaintiff The GmbH relied on the construction-related reasoning of its expert. The expert had assumed a useful economic life of 28 years at the time of acquisition; following the subsequent renovation of the façade including the thermal insulation composite system (around 2014), the main part of the building had a useful life of 34 years, while a secondary part had a remaining useful life of only 25 years at the time of acquisition. The plaintiff argued:
The building was already 27 years old in the first year in dispute.
Previous measures were limited to the usual modernization of extension parts; a significant extension of the useful life was not associated with this.
The shortest of the three relevant useful lives (technical, economic, legal) was decisive for depreciation; the evidence could and should take all three components into account.
The purchase price allocation based on the TÜV expert opinion had been accepted by the tax authorities and proved the plausibility of the expert opinion for financing purposes; this also spoke for its suitability for determining depreciation.
Future modernizations should not retroactively extend the remaining useful life; only conditions foreseeable at the time of the respective assessment should be taken into account.
Typical weak points of prefabricated buildings result from manufacturing and processing deficiencies of the GDR era.
Depending on the location, a greater tendency to corrosion in reinforced concrete components and an increased wind load on the windows (highest wind load zone) were relevant.
Response from the tax office Following a change in the plaintiff's registered office, the Rostock tax office assumed responsibility and obtained an expert opinion from its own experts. Their conclusion: The private expert opinion submitted did not prove a shortened useful life. Critical points were:
The statements were too general and referred to prefabricated buildings in general rather than to specific wear and tear factors of the property in dispute.
Rectifiable defects and an outdated standard were not sufficient to justify a shorter actual useful life; there was no evidence of substantial structural wear.
Statements on non-structural components with reference to the state of the art did not prove extraordinary wear and tear.
References to the standard of fittings, room concept, energy efficiency, accessibility, location, market and property rating were not viable evidence of loss of substance or limited economic usability.
The recognition of the purchase price allocation did not mean that the tax office had approved the useful life for depreciation purposes on which the expert opinion was based; the dual function of the expert opinion was not known.
Even with regard to the BFH ruling IX R 25/19, the evidence for a shorter useful life was not successful, as there were no reliable findings on technical wear and tear, economic devaluation or legal restrictions.
Court decision In its ruling dated 29.06.2023, the Mecklenburg-Vorpommern Fiscal Court found that the shorter actual useful life presented by the plaintiff was decisive in determining income from letting and leasing, rather than the statutory standardization (case no. 2 K 290/17). The court began by highlighting relevant BFH rulings, according to which taxpayers can provide evidence of a shorter useful life using any suitable method of presentation. Contrary to the opinion of the tax authorities, it is permissible to combine technical wear and tear, economic conditions and legal factors, provided that this is appropriate in the individual case. The expert witness heard in the proceedings confirmed this methodology.
According to these standards, the Senate considered the evidence of a shortened actual useful life to be established. The assumed remaining useful life of 28 years was within the permissible estimation corridor; the discrepancies in the expert opinion criticized by the tax office were not relevant to the decision. The court also clarified that the BMF letter of 22.02.2023 should not restrict the freedom to choose the method of presentation, as this would contradict supreme court case law.
Key message and significance The ruling confirms that tax authorities must respect the freedom to choose the method of proof when examining a useful life that deviates from Section 7 (4) EStG. When determining the remaining useful life, technical wear and tear, economic circumstances and legal usage limits can be taken into account together, provided that the expert opinion substantiates these factors and integrates them into a comprehensible overall estimate. For properties in prefabricated construction, this means that a well-founded, lower useful life - and thus a higher annual depreciation rate - can generally be recognized, even if the BMF letter of February 2023 is formulated more restrictively.