Corona aid does not qualify as extraordinary income subject to reduced income tax.

The Corona aid paid in 2020 does not constitute extraordinary income that would be subject to reduced taxation in the income tax. The fact that the profit earned was higher than in previous years ultimately only indicated an overestimation of the Corona aid. However, this did not result in extraordinary income.

The case of the Münster Fiscal Court (FG Münster) dated April 26, 2023, 13 K 425/22 E: The plaintiff operated a business as a sole proprietor, which included a restaurant and a hotel. In 2020, the plaintiff was affected by temporary operational restrictions and closures due to the COVID-19 protection regulations of the state of North Rhine-Westphalia. In the disputed year, the plaintiff received immediate aid amounting to €15,000, bridging aid I amounting to €6,806, and the so-called “November/December aid” amounting to €42,448 due to pandemic-related restrictions.

The tax office taxed the received Corona aid according to the regular income tax rate. The plaintiff appealed and argued that the Corona aid should be subject to reduced taxation in accordance with § 24 No. 1 in connection with § 34 (1) of the Income Tax Act (EStG). The aid payments were compensation for lost or discontinued income or for the non-exercise of an activity due to the pandemic-related closure of business operations. They resulted in extraordinary income because the plaintiff earned a higher profit in 2020 than would have been the case under normal business conditions. The business evaluations showed a pre-tax profit of approximately €80,000 for the disputed year, while the profit in the three previous years ranged between €55,000 and €70,000, significantly lower. The evaluations also showed that the revenue (excluding the disputed grants) for the disputed year was approximately €190,000, while it ranged between €260,000 and €290,000 in the three previous years. Therefore, the plaintiff argued for a reduction in income tax.

The Fiscal Court dismissed the lawsuit.

The reasoning: The conditions for a rate reduction according to § 34 (1), (2) No. 2, § 24 No. 1 of the Income Tax Act were not met.

From the court’s perspective, it was irrelevant whether the grants constituted compensation for lost or discontinued income according to § 24 No. 1 letter a of the Income Tax Act or compensation for the abandonment or non-exercise of an activity according to § 24 No. 1 letter b of the Income Tax Act. In any case, it did not qualify as extraordinary income within the meaning of § 34 (1) of the Income Tax Act.

In 2020, the plaintiff only recognized Corona aid as income, which also related to that calendar year. The Corona aid did not extend to other assessment periods, nor were they received in a different assessment period from the year they were paid for, and they coincided in this assessment period with the plaintiff’s regular business income. The fact that the plaintiff ultimately earned a higher profit in 2020 than under normal business conditions was irrelevant.

If the plaintiff referred to previous case law of the Federal Fiscal Court (Bundesfinanzhof), according to which a comparison of business income could be made, only the business income should be considered. However, in 2020, even taking into account the grants, the business income was below the level of previous years. The higher profit earned ultimately only demonstrated the overestimation of the Corona aid. However, this did not result in extraordinary income.