(2023)
When does the tax office recognise a discount as tax-reducing?
When financing a house or flat with a loan, a discount is often agreed. The discount - also known as Damnum - is deducted from the loan amount and is effectively an advance payment on the interest. This reduces the interest rate and the monthly instalments during the period for which the discount is prepaid.
The disadvantage is that due to the undistributed discount, a higher loan amount may need to be taken out, interest paid on, and repaid than with a loan without a discount. However, there is also a significant advantage: if the house or flat is rented out, the discount can be fully deducted as income-related expenses, provided it is "customary in the market" (§ 11 para. 2 sentence 4 EStG).
Since 2004, a discount with a fixed interest rate of at least five years can only be immediately deducted as income-related expenses up to 5% of the loan amount. The excess amount must be spread over the period of the fixed interest rate or - if this is missing - over the term of the loan (BMF letter dated 20.10.2003, BStBl. 2003 I p. 546).
Recently, the Federal Fiscal Court ruled that a discount higher than 5% can still be "customary in the market" and therefore deductible as income-related expenses.
Thus, a customary market discount for a loan with a term of more than five years does not need to be spread over the term but can be fully deducted in the year of payment. A discount of 10% for a 10-year loan term can indeed be "customary in the market" and therefore fully deductible (BFH ruling of 8.3.2016, IX R 38/14).
- The term "customary in the market" refers to the specific discount in question. Based on the function of a discount, its market customariness is determined by the amount of the discount in relation to the amount and term of the loan, in relation to current conditions in the credit market: What is customary in the market is to be decided based on current conditions in the credit market concerning the specific financed object. Linking market customariness to a fixed interest rate is not applicable.
- A customary market discount must be distinguished from "unusual" arrangements that do not fall within the usual framework of the current credit market. When this is the case is a matter for the court to assess.
- If an interest and discount agreement is concluded with a commercial bank as with third parties, this indicates market customariness. Given the usual obligation of commercial banks to control risks, interest arrangements agreed with a commercial bank are generally considered to be within the usual framework of the credit market. This presumption can be rebutted if there are special circumstances suggesting that the usual framework of the credit market has been exceeded. Such circumstances may include a particular credit unworthiness of the borrower, special personal relationships between the parties involved, or completely atypical contractual arrangements.
