VwGH – No provisions for impending losses due to lease expenses of loss-making stores

In a decision of 7 April 2022, Ro 2021/13/0009, the Austrian Supreme Administrative Court (VwGH) endorsed the case law of the German Federal Fiscal Court (BFH). According to this decision, provisions for impending losses arising from disadvantageous lease agreements can only be created if the leased property can no longer be used by the business.

Circumstances

The appellant operates in the food retail industry. Some of its stores were loss-making. The appellant continued to operate the stores as, due to the costs of continued lease payments, the loss incurred by closure would have been greater than the loss from keeping the stores open. In the experience of the appellant, it would only have been possible to sublet the property at 50% of the lease fee. For the period in which it was not possible to terminate the lease agreements, the appellant created provisions for impending losses arising from the lease agreements for the loss-making stores.

Decision of the VwGH

In pending transactions, it can generally be assumed that the respective mutual obligations are equivalent in economic terms. However, if specific circumstances can be evidenced that indicate that a loss is impending, it is permissible to create a provision.

Nevertheless, according to BFH case law, it is only permissible to create a provision for impending losses stemming from a lease agreement if the leased property no longer has any value for business operations, i.e. can no longer be used or sublet by the business.

In its decision, the VwGH has endorsed this view.

In the present case, the fact that the stores had value for the business can be derived from the fact that the loss from closure of the stores would have been higher than the loss from continued operation. In addition, other stores of the appellant that generated a negative profit margin were closed.

As the stores relevant to the dispute continued to be used by the business of the appellant, it was not permissible to create a provision for impending losses for the purposes of tax law.

Even if market lease rates were to fall while contractually agreed lease fees remained the same, this would not justify the creation of a provision in the view of the VwGH.

Summary / In practice

With this decision, the VwGH has departed from the ‘authoritative principle’. Even if it is permissible to create a provision for an impending loss in such cases under commercial law, this cannot be recognised for tax purposes.

The following options result from the decision:

• If loss-making stores continue to operate, the VwGH’s view is that no provision for impending losses may be created for (excessive) lease expenses.
• However, if stores that generate a negative profit margin are closed and no longer operated, impending loss provisions may be permissible in the view of the VwGH.