German Federal Fiscal Court changes tax status of usufruct settlements

The German Federal Fiscal Court (BFH) has ruled that compensation received for waiving usufruct rights on a property is now taxable if the usufructuary is renting out the property and earning income from it. This decision overturns a 1992 precedent which previously allowed such settlements to be treated as non-taxable asset restructuring.

The court reasoned that when a property is rented, the settlement effectively replaces the rental income that would have otherwise been collected. Consequently, the payment is classified as taxable compensation under the Income Tax Act.

The Federal Ministry of Finance has announced a transitional period following the ruling to allow individuals to assess their options before the new tax implications fully apply.