VwGH: Taxation of insurance compensation

Nov 17, 2021 Benn-Ibler Rechtsanwälte

The Administrative Court (Verwaltungsgerichtshof, VwGH) has ruled on whether an insurance compensation received for a property is subject to the special tax rate of Section 30a of the Income Tax Act (Einkommensteuergesetz, EStG).

The appellant ran a hospitality business and the property was severely damaged by fire. The appellant's business was continued provisionally with a tent and container next to it, and he agreed with the insurance company on a lump-sum compensation of EUR 400,000 with no obligation to rebuild.

In the following year, the appellant sold the property. He taxed the share of the insurance compensation allocated to the building (minus the book value of the building) at the special tax rate of 25 percent according to Sec. 30a EStG (old version) - today 30 percent - and justified this on the grounds that the compensation was already considered part of the proceeds from the sale. However, the tax office (Finanzamt, FA) assumed income from trade.

The Federal Fiscal Court (Bundesfinanzgericht, BFG) also did not follow the appellant. It stated that a sale of real estate is necessary for the application of the special tax rate; the destruction of an asset does not constitute such a sale.

The VwGH first pointed out that the special tax rate is also applicable to business income from the sale, write-up or withdrawal of real property pursuant to Sec. 30a para 3 of the EStG. Against the background of the reorganisation of the income tax treatment of the sale of real estate, this was to be interpreted as meaning that the special tax rate had two specific functions:

• Equal treatment of property sales with capital gains
• To cushion the abrupt disclosure of high hidden reserves

The receipt of compensation through the devaluation of the property also causes the realisation of hidden reserves. Thus, the insurance compensation must be assessed analogously as a transaction under Sec. 30 para 3 EStG, according to the VwGH.

Consequently, the contested decision of the BFG had to be set aside due to its substantive illegality.

Ra 2020/15/0003-5 (22.09.2021)