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Discounting a purchase price paid in instalments – Interest and income from capital assets

When an item that forms part of private assets is sold and the claim for payment of the purchase price is deferred for the long term – i.e. longer than a year – until a certain point in time then the interest and income from capital assets could be taxable.

In the ruling by the Cologne tax court, of 27.10.2022 (case reference: 7 K 2233/20), on such a situation it was decided that the purchase price instalments that had been paid had to be divided up into the principal and interest components. The interest component constitutes income from other capital claims and is thus subject to income tax. This would also apply even if the parties to the agreement had not agreed a rate of interest or had in fact expressly ruled it out. It is also irrelevant that on the part of the purchaser the benefit derived from paying in interest-free instalments is subject to gift tax.

It is open to question whether the Cologne tax court has thus placed itself at odds with a 2011 ruling from the Federal Fiscal Court [Bundesfinanzhof, BFH] (of 12.9.2011, case reference: VIII B 70/09). At that time, the BFH had serious doubts as to whether an interest-free deferral of a claim for the equalisation of accrued gains between a married couple could result in an income tax liability for the interest component because, for gift tax purposes, the conditions for a generous gift had likewise been satisfied. 

Please note: It thus remains to be seen what position the BFH will take in the appeal proceedings (BFH case reference: VIII R 1/23) on this situation where income tax law conflicts with gift tax law.

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