Subcontracting Translations can Lead to a Trade Classification

Are professional translators who provide their customers with regular and more than an inconsiderable number of translations into languages which they have not mastered themselves freelancers, or should they be considered a trade? BFH settled this dispute with its judgment of February 21, 2017 (re VIII R 45/13; published on June 7, 2017).

Subcontracting Translations can Lead to a Trade Classification

Translation of Many Languages

In the disputed case, the taxpayer was a civil partnership specialized in the translation of technical manuals, operating instructions and similar documentation for its customers. The translations were carried out regularly and to a not inconsiderable extent in languages which the plaintiff's shareholders did not personally speak. For this purpose, the plaintiff subcontracted to external translators and parallel to their services used a so-called translation memory system, i.e. a system for computer-aided translation and storage of texts.

In contrast to the tax office, the partnership considered their activity as freelance in the sense of §18 I 1 no. 1 EStG. The tax office was of the opinion that the plaintiff was commercially active and issued trade tax assessment notices for the dispute years 2003 to 2007; subsequently, legal action was unsuccessful.

The Federal Fiscal Court settled this dispute and held that freelance or tradesman classification depends on the translator's own language skills! In this case, the partnership was not translating a significant amount of text but brokering the services of other translators. Brokering is considered a trade and not a professional service. Which taxes a line of business is subject to relates to this differentiation. For further explanation, click here