Good advertising, bad advertising – and the world of trade tax

In its decision dated September 16, 2024, the Federal Fiscal Court (Bundesfinanzhof, “BFH”) (III R 36/22) decided that a service company may also be eligible for trade tax additions of expenses for the rental of advertising media (pursuant to Art. 8 no. 1 d and e GewStG (German Trade Tax Act).

In the underlying case, the plaintiff advertised for clubs as part of sponsoring measures, e.g., on jerseys, on the sidelines of the pitch and in program booklets as well as through mobile and poster advertising. In connection with poster advertising, advertising space was rented, e.g., on means of transportation, train stations, highways and restaurants. The entrepreneurs providing the services were advertising agencies and regularly did not own the advertising media. The tax court ruled that advertising expenses were not subject to addition pursuant to Art. 8 no. 1 lit. d GewStG because the advertising media were not deemed to be fixed assets. The tax office appealed and the case was brought before the BFH.

What does the decision of the BFH and the tax court mean in practice?

Service vs. asset

Not every advertising measure leads to an addition for trade tax purposes. In the opinion of the BFH, an addition depends on whether the contracts underlying the advertising measures are (more likely) to be classified as rental or lease agreements in terms of their essential legal content or at least contain separable principal obligations under rental or lease law.

The decisive factor for the classification of a contract is not its designation, e.g. “sponsorship contract”, but its respective content.

This allows the following interim conclusion:

No addition: Expenses for pure services (e.g., concept development) or digital advertising media (e.g., without reference to physical advertising media), production and storage of advertising material, placement of advertising spots on passenger TV, etc.

Possible addition: Expenses for the use of another company’s fixed assets (e.g., billboards, advertising boards, highway towers or surfaces on means of transportation and at train stations) and similar.

Notional allocation of the advertising media to fixed assets

Furthermore, the (notional) allocation to fixed assets is decisive for an addition. Usually, advertising media are not part of the property and therefore not part of the tenant's fixed assets.

In the BFH’s opinion, it is possible that advertising media may also be regarded as notional fixed assets in the case of service companies. This may be the case if they either rent advertising media on a long-term basis or regularly use the same advertising media on a short-term basis. The decisive factor is whether the company is permanently dependent on such advertising media due to its business purpose or has to maintain them in its business.

The BFH referred the case back to the tax court in order to examine the subject matter of the contract and the possible allocation to fixed assets.

In its decision of October 17, 2024 (III R 33/22), the BFH also dealt with the addition of advertising measures for trade tax purposes. The BFH ruled that certain expenses for the use of advertising space in the area of so-called “out-of-home advertising” are not subject to trade tax additions.

In this case, too, the BFH focused on the classification of the contracts. The decisive factor was whether the principal obligation was the transfer of use (rental agreement) or the provision of an advertising service (contract for work and services).

In its decision of October 17, 2024, the BFH came to the conclusion that the advertising media providers not only provided the space, but were also responsible for the advertising measures’ success and that the contracts therefore constituted a contract for work and services. With regard to the qualification as (notional) fixed assets, the court referred to the fact that the use of the space was (only) project-related and not aimed at permanent operational use.

Practical advice for companies

The decisions reflect the tax authorities' trend towards expanding trade tax additions. In order to be well positioned in this respect, not only with regard to tax audits, companies should review existing or new contracts to be concluded in order to determine whether they would qualify as rental or lease agreements or contain separable principal obligations under rental or lease law. The following points should be taken into account in particular:

Contractual clarity: The subject matter of the contract concerning the advertising medium must clearly specify whether it concerns a service (contract for work and services, etc.) or the use of advertising media (rental/lease agreement, etc.).

Separation of mixed expenses: In the case of mixed services (e.g., concept development with subsequent rental of advertising space by the other company), a clear distinction must be made.

Documentation of the scope of services: Clear documentation on the intended purpose helps to prove the economic focus of the service, e.g., selective project-dependent rental, in the event of a tax audit.

Do you have any questions? Please feel free to contact us.