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Controllability of a compensatory payment for initial afforestation on privately owned property.

August 1, 2012 | 70,00 EUR | answered by Wirtschaftsprüfer André Hintz

Facts: Properties that are privately owned are made available for reforestation as part of a nature conservation compensation measure, after obtaining the necessary approval from the forestry authority, and are thus irreversibly converted into forest land. In doing so, the property owner contractually assumes the legal obligation of a third party who must create a nature conservation compensation area. Reversing the conversion back to grassland/farmland is no longer permitted, or if approved, a compensation payment must be made to the forestry office, which will be used to create new nature conservation compensation areas or the areas must be created by the owner themselves.
The contract is usually concluded with the forestry office. The property owner receives compensation from the forestry office, among other things, in the form of replacement funds, as the forest is significantly less valuable than the grassland/farmland prior to afforestation. The properties remain the ownership of the compensation recipient. The usability of the properties is severely restricted. After the expiry of the 10 or 12-year contract period, the timber can be harvested if it is matured after 30 to over 100 years.
During the 12-year contract period, for example, timber use (young plants) and other uses are practically impossible. The afforestation and care of the young tree population during the mentioned period is the responsibility of the property owner and is separately remunerated in addition to the compensation, usually taken over and billed directly by the forestry office.
Other nature conservation compensation measures (e.g. biotopes) may possibly be reversed after a longer, e.g. 30-year contract period, but not the forest.

Question: Can the compensation received, which is intended to compensate for the significantly reduced value of the properties, be treated as a non-taxable compensation payment for a transaction similar to a sale due to the exceptionally intense level of intervention and the very high loss of substance value? Which legal provisions/chains of norms can support or confirm this assessment? Are there any court judgments in this regard that confirm this assessment or pending, open court proceedings?

Treating it, for example, as other income according to § 22 No. 3 EStG would lead to a much higher total profit due to the fact that a profit-reducing partial write-down (from grassland/farmland to forest land book value) is not possible in private assets, resulting in a comparatively very high income tax burden and thus a strong tax inequality. Additionally, the income would have to be fully taxed in the year of receipt due to the principle of accrual, as it is evidently not possible to allocate it over the (contract) term!? Would any tariff reductions be possible in this case?

What other possible solutions could be considered?

Thank you in advance and best regards.

Wirtschaftsprüfer André Hintz

Dear inquirer,

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 is related to the situation you have presented.

In my opinion, these are income from agriculture and forestry that you generate through reforestation and other operations. This includes compensation payments; to my knowledge, these are not exempt from taxation.

The tax liability is based on §§ 13 et seq. of the Income Tax Act. When you enter into a contract with the forestry office, you are starting a forestry operation. Your privately held property automatically becomes business property if you operate the forestry business as a sole proprietorship.

The deposit into the business assets is made at current market values. This also constitutes a capital gains event under § 23 of the Income Tax Act if the property is removed from the business assets within 10 years.

If a permanent impairment in value results from the change in use after the deposit into the business assets, you can claim a partial write-down for tax purposes.

However, it is important to clarify in advance with these long-term investments whether a total profit can be achieved or if it is considered a hobby.

If there is an intention to generate profits and a profit can be achieved through the sale of wood, land, and other income, all your income minus your expenses will be subject to taxation.

It should be noted that income from agriculture and forestry is usually only taken into account if the income exceeds 670 euros or if you already have total income higher than 30,700 euros.

I hope my explanations have been helpful to you.

Yours sincerely,

André Hintz
Tax consultant