Selected questions of tax law
TAX DEDUCTIBILITY OF FURTHER EDUCATION COSTS
(IN PARTICULAR MBA AND LL.M)
Vocational training costs are incurred when learning a profession that will be practised in the future. These include all measures involved in a first apprenticeship, first degree and any retraining, if subsequent gainful employment in this profession is evident. Following the implementation of the "Act to amend the Tax Code and other laws" (Gesetz zur Änderung der Abgabenordnung und weiterer Gesetze) on 21.07.2004 , the costs incurred in any training fall under special expenses and are limited to EUR 4,000.00 per year according to § 10 paragraph 1 no. 7 of the Income Tax Act (EStG). However, this limitation was unconstitutional. According to the rulings of the Federal Fiscal Court (Bundesfinanzhof, BFH) (rulings of 28.07.2011 - VI R 7/10 and VI R 38/10), the costs of the first apprenticeship or first degree can be claimed without any limitation in terms of amount (i.e. without EUR 4,000 under special expenses) as anticipated operating expenses or income-related expenses. However, the BFH requires a sufficiently concrete causal relationship with the subsequent income. In the opinion of the BFH, though, a causal relationship exists if professional knowledge is imparted. However, in reaction to the rulings, the lawmaker has restored the state that existed before the change. In an Act dated 07.12.2011 (BeitrRL-UmsG; Federal Law Gazette I 2011 p. 2592), the lawmaker, with its revision of § 9 para. 6 EStG and § 12 no. 5 EStG, annulled this favourable ruling of the BFH and even retroactively restored the legal position since 2004. The distinction between first apprenticeship and second apprenticeship will therefore be relevant again for the full tax deduction of further education costs (see below). The lawmaker has only accommodated the taxpayer with the increase in the special expenses deduction in 2012 from € 4,000.00 to € 6,000.00. It remains to be seen here whether this change in law withstands a judicial review. The BFH’s arguments against any limitation of the deduction of further education costs remain valid even after the change in the law, the prospects for the unlimited deduction of further education costs are therefore good. Here too the question needs to be asked whether there is a breach of the net principle and whether the retroactive deduction of income-related expenses is constitutional. A number of appeals against this change in the law have already been lodged with the BFH and are pending. However, the 8th Senate of the BFH ruled on 05.11.2013 that the first degree is not deductible as anticipated operating expenses or anticipated income-related expenses (file no. VIII R 22/12) and that the changes by the lawmaker were constitutional. This view is not shared by the 6th Senate of the BFH, which, in its ruling of 17.7.2014 (VI R 2/12 and VI R 8/12), presented the question of the constitutionality of the non-deductibility to the Federal Constitutional Court for its ruling (BVerfG 2 BvL 23/14 and 24/14). According to the 6th Senate of the BFH, § 9 para. 6 EStG in the version of the Tax Recovery Directive Implementation Act (BeitrRL-UmsG) is in breach of the general principle of equal treatment in the expression of the constitutional requirement derived from it of taxation based on financial capacity. The Federal Constitutional Court will therefore have to deal with this issue and clarify the legal position. The distinction between a first apprenticeship and further education according to the current legal position will be decisive at least for the Tax Offices. In each case an appeal should be lodged until final clarification and corresponding tax returns should be submitted.
According to the law, all measures that allow the typical know-how required for the profession and ultimately an independent, secure lifetime position to be acquired are vocational training costs. These costs involve in particular the costs of a first apprenticeship or retraining. Vocational training costs are, according to the ruling, only recognised if objective circumstances indicate that the training will lead to subsequent gainful employment. According to the ruling, it is however not necessary that the training takes place in a traditional state-approved training course (BFH 21.12.2011 - VI R 52/10; Cologne Finance Court 12.12.2011- 7 K 314/08). "Short training courses", for example training to become a paramedic, taxi driver, programmer or a six-month in-house training course to become a flight attendant were recognised up until 31.12.2014 as a first vocational apprenticeship. With effect of 01.01.2015 the lawmaker once again determined restrictively in § 9 para. 6 clause. 2 EStG that a first apprenticeship only exists if it is an organised apprenticeship lasting at least 12 months in the case of a full-time apprenticeship and, if provided for, with a final examination. However, an appeal should be lodged here too until the legal position has been finally clarified with reference to the ruling of the 6th Senate of the BFH of 17.7.2014 (VI R 8/12).
Further education costs are in contrast deductible in full as income-related expenses according to § 9 EStG (or operating expenses according to § 4 EStG). Further education costs include among others costs incurred by a training measure in the same profession. This is often the case if the taxpayer for example has a first degree which has lead onto a professional qualification and the following second degree builds on this. The first state examination is a degree that qualifies for a profession and imparts the professional competence for a professional trainee position. Therefore expenses for the traineeship after the first state exam are deductible without limitation as income-related expenses. The same applies for the costs of a doctorate or an MBA/LL.M. Expenses for a second degree after a first degree has been completed are always deductible without limitation as income-related expenses. Unlike before 2004, it is no longer necessary that the second degree deepens and broadens the knowledge acquired in the first degree, because the expenses are also deductible as income-related expenses with a different second degree and a change in profession. Providing the degree has a sufficiently concrete relationship with the future income from the intended occupation and is not completed purely for private reasons. For any training measures after a first vocational apprenticeship or a first degree has been completed are considered to be further education. The completion of a first vocational apprenticeship or the degree acts as a distinction between training costs and further education costs.
The costs incurred here can be deducted as income-related expenses. In particular the tuition fees, study materials, travel expenses based on business travel principles are deductible (BFH 9.2.2012 - VI R 44/10, VI R 42/11). Where applicable, expenses for a second residence (e.g. accommodation and food costs, flights and journeys home) or external activity are deductible. This can even be the case if, in addition to the accommodation at the place of further education, only one room is occupied in the parental home (BFH file no: VI R 78/10). However, there is a risk here that the Tax Office generally questions the student’s residence in Germany and refuses a tax assessment. Rightly however, even if a residence is not given, within the limited tax liability at least a loss assessment has to be made (contentious).
The Tax Office also requires that the expenses for the further education measure (e.g. for the MBA degree) have been caused by taxable income. Such a cause can also exist if the professional activity has not yet commenced. In this case the expenses are anticipated income-related expenses (relating to the future profession), providing there is a clear economic relationship with an intended occupation. This means that the deductibility of the income-related expenses can be put at risk if, after completing the degree, no taxable income is earned in Germany, at least initially. In this connection it is contentious whether anticipated income-related expenses can be assessed if the student does not have a residence in Germany during the degree course.
From a tax point of view, whether the costs of the masters degree programme are classified as further education costs (entirely tax deductible) or can at best be classified as vocational training costs (no more than € 6,000.00 deductible) is therefore of crucial importance. The requirements for the recognition of further education costs were met in the opinion of the Federal Fiscal Court for example in the case of a business graduate who then went on to gain an MBA. The admission requirement was a completed degree. The plaintiff’s profession did not change as a result of the MBA degree. In this connection the Federal Fiscal Court finds that the MBA degree is designed to familiarise the student with all areas of management and impart knowledge to generalists, so that specialist knowledge for management tasks is passed onto business, economics, engineering, law, natural sciences and humanities graduates alike. It therefore meets as a short, practically oriented course the criteria of a postgraduate course which does not enable a change in profession, but shows the plaintiff as a business graduate with special additional knowledge (cf. BFH, Federal Tax Gazette 1996, Part II, p. 452).
The costs incurred by the further education are to be declared in the tax return for the year in which the respective costs were incurred. Costs above the income can either be carried back to the previous year or carried forward to future years. This is also the case if, in the year in which the respective costs were incurred, no or only a small taxable income was earned. Any losses remaining after this can be carried forward to the future without limitation and result in considerable tax refunds in subsequent tax returns. However, it is necessary that taxable income is earned subsequently in Germany and an unlimited or at least limited (contentious) tax liability remained in Germany during the time of the further education.
Study costs for previous years can also possibly still be claimed. If a tax return was not submitted for years of study before 2011 (e.g. because there was no taxable income), a tax return can still be submitted within the assessment limitation period defined in § 169 of the Tax Code (AO). This limitation period is up to 7 years after the tax year for assessable taxpayers. It is derived from the assessment period of 4 years (§ 169 AO), which only starts after the 3rd year after the tax year concerned (§ 170 para. 2 no. 1 AO). As the two-year limitation period for applications for tax assessments was annulled with the Annual Tax Act 2008 (Jahressteuergesetz 2008) (§ 46 para. 2 no. 8 EStG 2008) (the revision applies from 2005), study costs can now be declared with retroactive effect up to 4 years, and in some cases even up to 7 years later. Until the end of 2015 this is at least still possible for 2011. The loss assessment goes even further. Study costs can be claimed retroactively with an application for subsequent loss assessment for up to 7 years, if a final income tax assessment has not yet been received. An application can still be made up until the end of 2015 for 2008. The BFH has ruled in this respect that a loss assessment in accordance with § 10d EStG is still possible if an income tax assessment for the respective year has not been received (BFH 13.1.2015 IX R 22/14).
I represent in particular MBA students (e.g. INSEAD, IESE, Columbia) on almost all well-known programmes and accordingly have a wealth of specialist experience which I would be pleased to put to use for your benefit.
If you have any questions please do not hesitate to contact me.
Regarding the question of how you can fund an employee’s studies as an employer, see my interview in the journal Personalwirtschaft, special edition 4/2011