Limitation of Deductibility of Litigation Costs

Section 33 Paragraph 2 Sentence 4 of the German Income Tax Act (Einkommensteuergesetz -EStG) – Extraordinary Expenses – has the following wording now:
“Aufwendungen für die Führung eines Rechtsstreits (Prozesskosten) sind vom Abzug ausgeschlossen, es sei denn, es handelt sich um Aufwendungen, ohne die der Steuerpflichtige Gefahr liefe, seine Existenzgrundlage zu verlieren und seine lebensnotwendigen Bedürfnisse in dem üblichen Rahmen nicht mehr befriedigen zu können.“

Rough translation:

Expenses incurred for legal proceedings cannot be deducted from the income, unless they were necessary to avoid that the debtor of the income tax loses his/her means of existence and the means to meet his/her needs in the usual way.

Through the above change, the possibility to deduct private litigation costs as extraordinary expenses, created by the judgement oft the Federal Financial Court of May 12, 2011, has been considerably reduced. It remains to be seen how things will develop.