Transfer of title to real estate under a contract of subsistence does not count as a taxable disposal of capital

The appeal was filed against judgement ref. No. I U 1899/2018 of 18 February 2020 rendered by the Administrative Court of the Republic of Slovenia, wherein the Administrative Court upheld the position of the tax authority that the plaintiff generated a profit by disposing of real estate on the basis of an contract of subsistence, which constitutes taxable income from capital in accordance with ZDoh-2. The Administrative Court rejected the plaintiff’s objection that the transfer of real estate under the contract of subsistence should be treated the same way as a transfer under a lifecare contract. The Administrative Court was of the opinion that the difference between the referred taxable positions in taxation is justified, as the contracts differ from each other as regards the moment of transfer of title. 

Both the contract of subsistence and the lifecare contract are obligational-juridical contracts with elements of succession law. Under a contract of subsistence the subsistee undertakes to transfer title to his specific real estate to the recipient, and the recipient commits to provide specific benefits and services to the subsistee or any other person until his death. Under a lifecare contract the maintaining party undertakes to support the maintained party or any other person, and the other contracting party declares that he or she will leave the former all or part of his or her property comprising real estate and the movable property intended for the use and enjoyment of the real estate. The main difference between these contracts is that under the latter the transfer of title is postponed until the transferor’s death. 

Unlike the disposal of real estate on the basis of a lifecare contract, which pursuant to Article 95(2) of ZDoh-2 is considered a non-taxable disposal of capital, ZDoh-2 does not provide for such an exemption for contracts of subsistence (explicitly). Therefore, in view of the appellant’s exposure, the Supreme Court examined whether the distinction between the two positions was justified. 

The Supreme Court emphasised that the reason for exempting a lifecare contract under Article 95(2) of ZDoh-2 must be sought in the legal nature of this contract. A lifecare contract has a distinct social emphasis – the owner transfers his assets or part of his assets with intent to be maintained for the rest of his life by the maintaining party. Due to the social aspect of this contract, i.e. maintaining the help-needing party, the legislator classified the transfer of real estate under this contract as a non-taxable disposal of capital. According to the position of the Supreme Court, the same applies to a contract of subsistence – the interests of the contracting parties are essentially the same as in lifecare contracts. 

Both of the contracts are aleatory, with a distinct social emphasis, which is why the Supreme Court concluded that from a tax point of view the position of subsistee under a contract of subsistence should be treated in the same way as that of a maintained party under a lifecare contract, regardless of the difference in the moment of transfer of title to real estate. 

Author: Klavdija Kek, Senior Associate