_limits of taxation: hobby (liebhaberei)
If the tax authorities classify an activity as a hobby (Liebhaberei), no taxes must be paid, but losses and expenses cannot be claimed. What is Liebhaberei, and when do companies need to be careful?
What is Liebhaberei?
The term "Liebhaberei" (hobby) distinguishes whether income must be taxed. (§ 2 I, II EStG). If an activity is classified as a hobby, the payment does not have to be taxed, but the losses cannot be offset against tax. Liebhaberei exists if the activity is pursued without the intention of making a profit.
Intention to make a profit and its objective indications
The intention to make a profit means the taxpayer's intent to make a profit. As an intention, it is defined subjectively, i.e. such intention can only be concluded based on objective indications. Such intention exists if, during the whole period of operation:
- profits are to be expected according to the type of management and the nature of the business,
- the business is managed according to business principles.
Even if an activity brings in losses over a more extended period, this does not speak against an intention to make a profit. Rather, it must have been accepted at least as a secondary purpose to achieve profits.
Examples of hobby (Liebhaberei)
Typical for a hobby is that the activity was taken up out of personal inclination. This is the case, for example, when renting out a sailing yacht or, less obviously, when operating a restaurant in an elaborately restored building so that over a long period, the costs of the business exceed the income. Similarly, activities that aim to make losses to save taxes elsewhere may be classified as Liebhaberei.
For businesses: The essential facts in brief
Anyone who operates a business typically also acts to make a profit. However, caution is advised in the case of more considerable losses over a more extended period. To avoid the accusation of hobbyism, however, it is usually sufficient to present a conclusive argument that serious measures were taken to achieve business success. In this way, start-up losses of new businesses can also be claimed. However, caution is also required here if the start-up is merely based on personal interests and inclinations and can be derived less from business management considerations. The presumption of Liebhaberei can be refuted.
- by submitting a business management concept
- assertion of restructuring measures
- Evidence of measures to reduce costs
- Evidence of efforts to increase sales
In the event of a tax audit, it is helpful if a business concept can be presented which provides a total profit forecast for the period under consideration. This concept should have been prepared before the start of the business and is often requested by the tax authorities.
As always, it depends on the individual case. We will be happy to advise you.
Contact:
Dr. Thomas Wülfing Specialist lawyer for commercial and corporate law; Specialist lawyer for tax law, Partner.
Christoph Klink, Lawyer, Associate.