Taxation of direct forest investments
May 23, 2012 | 25,00 EUR | answered by Wirtschaftsprüfer André Hintz
Dear Sir or Madam,
Recently, I read about the company ForestFinance (www.forestfinance.de) on the internet, which offers direct forest investments.
In my case, I am interested in the so-called GreenAcacia project. In this project, a plantation is leased and a forestry service contract is also signed.
Profits from thinning operations are paid out annually, as well as after 7 years following a final harvest.
Now my question is: how would this be taxed? Do the profits (or possibly even the revenues) fall under the category of capital gains tax or possibly income tax (if so, can the service costs, i.e. the "investment", be claimed as advertising costs)? Could this potentially be income from agriculture and forestry?
I hope you can assess the scenario presented from a tax perspective.
Yours sincerely,
the inquirer
Dear questioner,
I would like to answer your question within the scope of an initial consultation and based on your fee commitment, along with the rules of the online portal. My response refers to the situation you have presented.
The question is whether this constitutes the commencement of a taxable activity.
If you participate in general economic activities with the intention of generating sustainable profits, your income is subject to taxation. You must report the commencement of your activity to your tax office within four weeks.
In my opinion, this type of project is assumed to involve commercial profit-making, as you are not working in agriculture or forestry yourself and it is not an investment in a fund or similar. Therefore, you would be a sole proprietor and would need to register with your local trade office.
With commercial profit income, you can prepare an income-surplus calculation up to a certain threshold. You are also required to submit a tax return.
If the forestry projects are located abroad, it must be determined whether the income is exempt from tax under the respective double taxation agreement. However, this depends on the specific terms of the agreement and needs to be assessed on a case-by-case basis.
If no profit is made in the initial years, the tax office may quickly request a profit forecast to determine if a profit will ever be made throughout the entire duration. If no profit is made during the entire duration, it may be considered a hobby by the tax authorities, and the income (gains and losses) would no longer be subject to tax.
You have the option to obtain a binding ruling from your tax office in advance. With a detailed description of the situation and a submitted profit forecast, the tax office will definitively inform you whether you are generating taxable income as described, or if it constitutes a hobby. I would be happy to assist you in preparing the binding ruling.
I hope my explanations have been helpful, and I remain
Yours sincerely,
André Hintz
Tax Advisor
Steuerberatung@andrehintz.de
