Forest cutting right and timber

Here you can find an overview of the taxation of income from the transfer of cutting right or timber or from the Natura 2000 support for private forest land. Depending on the circumstances and conditions under which timber is transferred or Natura 2000 support granted, the income received is taxed either as business income or as gains from transfer of property.

For tax purposes, it is important to know whether the property of a sole proprietor (FIE) or a private person is transferred, as the bases for taxation, tax burden, tax calculation and the declaration of assets are different.

Transfers are transactions which result in a change of ownership, such as purchase and sale transactions, gifts, exchange, etc., with the exchange transaction subject to the provisions of a contract of sale. In the case of exchange of property, the difference between the acquisition cost of the property subject to exchange and the market price of the property received as a result of the exchange is regarded as taxable income.

Ways of transferring forest

One can transfer:

  • forest land (immovable property)
  • cutting right (growing forest)
  • timber (felled tree, stem, the part of stem acquired by means of cross-cutting the stem or slash)
  • processed timber (firewood, boards, squared timber, etc.)
  • usufruct (registered in the land register, usufructuary uses the property and acquires its fruits)

The transfer of cutting right does not involve the transfer of immovable property, but the transfer of the right to use the resource.

Income is also derived from the leasing of forest or other long-term contract. Income is also derived from the leasing of forest or other long-term contract. If the rental income does not constitute business income for a natural person, no deductions can be made from the rental income.

According to subsection 28(2) of the Forest Act timber is:

  1. felled tree and stem
  2. the part of stem acquired by means of cross-cutting the stem;
  3. slash

Slash is the tops left over from cross-cutting of trunks, branches left over from lopping, warts left over from lopping, undersized log sections, and trees cut from the undergrowth with branches.

Income can also be derived from the Natura 2000 support for private forest land. The support must be declared in the income tax return.

Differences between the taxation of natural persons and sole proprietors

Forest owner is a natural person

If the forest owner is a natural person (private person) who sold timber or a right to cut trees, or received the Natura 2000 private forest land support, he or she declares the income received in table 6.2 of form A of the income tax return. The calculation of gains and expenses carried forward is made in the annex to table table 6.2.

  • If timber is sold as a private person, it is considered as gains from the transfer of property.
  • Gains derived from the transfer of property is the difference between the acquisition cost and the selling price of the sold property. 
  • Costs directly linked to the sale of property can be deducted from the gains.
  • The gains are subject to income tax only and no social tax is paid.

The income tax return of a resident natural person must be submitted by 30 April of the year following the transaction (by 31 May in 2021).

The following benefits apply to the submission of income tax return:

  • expenses related to forest management can be deducted from the income received if it is forest management within the meaning of the Forest Act
  • expenses can be deducted from the gains of the the year in which the expenses incurred or from the three following years
  • gains can be carried forward to up to three subsequent years
  • up to 5 000 euros can be deducted additionally during a taxable period
  • in the year when the income is derived, the acquisition cost of the part sold can also be deducted from the income

A special tax arrangement has been established for the income derived from transfer of cutting right or felled timber. As of 2020, the Natura 2000 support for private forest land is also subject to the special arrangement.

Gains derived from the sale of cutting right or timber can be carried forward to up to three subsequent taxable periods.

For example, if a forest owner received income from the sale of cutting right or timber in 2020, the gains received will be taxed on the basis of the income tax return of 2023 at the latest. The gains can be taxed in the tax returns of 2020, 2021, 2022 and 2023.The expenses of forest management incurred between the receipt of the income and the taxation of the gains can be deducted from the gains. This means that the expenses related to forest management can be divided between four taxable periods as well.

The expenses related to forest management can be declared when the forest management is carried out as defined in the Forest Act. Pursuant to section 16 of the Forests Act, forest management means reforestation, silviculture, use of forest and forest protection. If the Forest Act imposes a requirement to submit a forest notification to the Environmental Board concerning management activities, the Environmental Board must have authorised the activities planned in the forest notification.

Management costs that can be taken into account must be documented. Expenses covered from non-taxable support cannot be deducted from the gains.

For example, sets for reforestation were purchased for 875 euros and reforestation aid in the amount of 700 euros (exempt from tax) was received from the state under the Forest Act. The amount that was self-financing by the forest owner, i.e. 875-700 = EUR 175, can be declared as forest management costs. If the expenses of forest management are higher than the gains derived from the forest, the expenses of forest management can also be carried forward to up to three years.

Example
In 2018, a forest owner received 17 000 euros from the sale of timber. The forest owner deducted the acquisition cost of 7 000 euros and the costs related to the sale transaction in the amount of 1 000 euros from the gains in that year, and carried forward gains in the amount of 9000 euros (17 000-7 000-1 000 = 9 000 euros).

In 2019, the forest owner invested 4 000 euros in forest management. Gains, now in the amount of 5 000 euros (9000-4000 = 5000), were carried forward to 2020. In 2020, the forest owner spent 6 000 euros on forest management.

To 2021, the forest owner will carry forward expenses exceeding the gains (6000-5000 = 1000 euros). With the costs carried forward, the forest owner can reduce the income from forest received from 2021-2023.

As of 2020, an amendment to the Income Tax Act has been in force, according to which forest owners can additionally deduct up to 5 000 euros from the income derived from transfer of cutting right or timber during a taxable period. The amendment also extends the right to deduct to the Natura 2000 support for private forest land.

If an immovable has more than one owner, each co-owner or joint owner can deduct the additional 5 000 euros from his or her income derived from the forest. If a private forest owner has several immovables covered with forests from which income is received, a total of 5 000 euros can be deducted from the income derived from these forests.

Although gains and expenses can be carried forward to the three taxable periods following the year in which the gains or expenses incurred, the additional deduction of 5 000 euros can not be carried forward to subsequent years.

The additional tax incentive cannot be implemented in the case of transfer of forest land or processed timber. Similarly, where a usufruct agreement has been concluded for forest management, the usufructuary is not entitled to a right of additional deduction, since the incentive is available to the owner of the immovable property in respect of the immovable property he or she owns.

After purchasing an immovable covered with a growing forest, the acquisition cost of

  • the purchased plot of land can be taken into account when transferring the immovable, and
  • the purchased growing forest can be taken into account when transferring cutting right or timber. The part of the acquisition cost corresponding to the part sold can be taken into account.

The part of the acquisition cost of an immovable taken into account to reduce the amount of income received from the transfer of cutting right or timber cannot be taken into account again in order to reduce income derived from the transfer of the immovable.

The acquisition cost of an immovable can also include documented improvement costs, such as land improvement costs, construction costs of culverts, etc., if they are not included in the costs of forest management.

The acquisition cost can only be declared in the taxable period during which income was derived from the forest. Before taking into account the acquisition cost, expenses incurred in the same year and carried forward from previous years will be deducted from the income received.

If the taxpayer wishes to use the acquisition cost to reduce the gains (income – expenses) received, it must be declared in line 7 of table 6.2 of the income tax return form A.

Upon taxation of the income from transferring forest land, a natural person has the right to deduct documented costs directly related to the sale or exchange of forest land from the selling price. The costs of forest management are also considered to be the costs related to the transfer of cutting right and felled timber. A forest owner who has received support for Natura 2000 private forest land must manage the forest in accordance with the rules of Natura forest land. These costs can also be deducted from the income received.

The costs of felling, storage, transport, etc. of timber, including the costs of purchasing the service, which are paid in order to gain profit from the transfer of property, are costs directly related to the transfer.

The costs directly related to the sale of the asset are essential costs associated with a particular transfer without which the transaction cannot be carried out, or costs which allow the transaction to be carried out more successfully or would not have incurred if the transaction had not taken place. For example, if timber had not been sold, it would not have been necessary to cover the costs of logging and transporting.

However, the expense related to selling is not, for example, compensation for environmental damage caused by logging.

The costs of acquiring equipment necessary for logging are not considered as costs related to transfer, since such activities refer to entrepreneurship as an independent economic activity. The acquisition costs of such equipment can only be declared by a sole proprietor.

Forest owner is a sole proprietor (self-employed person)

A sole proprietor can additionally deduct up to 5 000 euros from the income derived from transfer of timber or cutting right from his or her immovable property and from the Natura 2000 private forest land support during a taxable period. All documented business expenses incurred by the taxpayer during the taxable period (silviculture, logging, acquisition of equipment, employed labour, etc.) can be deducted from income.

In the case of transfer of cutting right or timber from forest land which is the object of a business activity or the receipt of Natura support for private forest land on a business property, the income received is business income from which the owner of the forest land can deduct additionally up to 5 000 euros exempt from tax.

For the purposes of taxation of income, it is relevant whether the cutting right and timber transferred originate from an immovable belonging to a sole proprietor (business assets must be separated from the assets for personal consumption) or from an immovable belonging to another person (e.g. a friend, brother, spouse’s separate estate, etc.) and whether support for Natura private forest land is granted for an immovable belonging to a sole proprietor, as the sole proprietor is subject to an additional tax exemption of up to 5 000 euros from the sale of cutting right and timber and from the Natura support only if the immovable property is his /hers.

The additional deduction does not need to be supported by documentary evidence and will be taken into account only after the deduction of expenses supported by documentary evidence from business income. The additional exemption cannot generate loss in the taxable period. The part of the exemption not used in a taxable period can not be carried forward to a following taxable period.

The additional tax incentive cannot be implemented in the case of transfer of forest land or processed timber (e.g. firewood, wood chips).

  • Timber is classified as unprocessed and processed (e.g. squared timber, boards, firewood, wood chips, chemically treated timber, etc.) material. 
  • In the case of transferring processed timber, the general principle of taxation is applied, i.e. it is either a transfer of property or a business activity. The special tax arrangement for income from the transfer of cutting right or felled timber cannot be used in the taxation of income derived from the sale of processed timber. 
  • The additional deduction of 5 000 euros cannot be taken into account in the case of transferring processed timber.

Forest land is a plot of land on which forest grows and which is entered in the land register. Taxation or non-taxation depends on how forest land has been acquired and whether it has been used for business purposes.

If the entitled subject of ownership reform transfers the forest land returned to him or her in the course of the ownership reform, the income received is exempt from tax, even if the forest land was used for business purposes or is transferred in instalments.

If the acquisition cost of the transferred forest land has been deducted from business income, the selling price of the forest land or the market price of the asset obtained in an exchange will be considered as the business income of a sole proprietor.

When forest land, the acquisition cost of which has been previously charged to business expenses, is taken into personal consumption (e.g. when discontinuing or suspending business activity for more than 12 months), the market price of that forest land is considered to be business income. In the event of a later transfer of that forest land by the same person, it is considered as a transfer of the property of a natural person (not of a sole proprietor) and the income received is subject to income tax. For the purposes of calculating taxable gains the acquisition cost of forest land is the market price of the forest land added to business income.

Personal consumption does not arise when business assets are transferred to or inherited by a person (either a company or another sole proprietor) who continues the business activity. If forest land acquired free of charge as a gift is transferred, the gains from the transfer are considered the gains of a natural person and the cost of acquiring the property is zero.

However, if the recipient of the gift has incurred improvement costs, they can be considered as acquisition costs and deducted from the income.

If an immovable with a growing forest is purchased, the owner can essentially divide the purchase price of the property into two: the part that can be taken into account in the transfer of the immovable and the part that can be taken into account when transferring cutting right or felled timber. The taxable value of land can be taken as the basis for calculating the part of the purchase price of the land if the purchase document does not show the land price and the forest price separately. The part of the acquisition cost taken into account in the calculation of taxable gains from the transfer of cutting right or timber can not be taken into account for a second time when the land is transferred. The acquisition cost of a property can also include documented improvement costs, such as land improvement costs, cost of building culverts, etc.

Example
In 2020, a sole proprietor received 15 000 euros from the sale of timber from his or her forest and 3 000 euros of Natura 2000 support for private forest land.In 2020, the sole proprietor covered the documented costs of logging and equipment in the amount of 6 000 euros. The sole proprietor’s business income is 15 000 + 3000 – 6000 = 12 000 euros. Sole proprietors can reduce their taxable income by 5 000 euros. The sole proprietor therefore gains 12000-5000 = 7 000 euros before the inclusion of other types of forestry-related support.

  • In the case of personal consumption of timber the acquisition cost of which has been charged to business expenses, the market price of the timber will be added to business income;
  • Where cutting right or felled timber is transferred from or the Natura 2000 support for private forest land is received for forest land that has been purchased or acquired as a gift or inheritance, and that is not an object of business, the gains received are considered as gains from the transfer of property and are declared in table 6.2 of the income tax return form A, and the taxation is based on a special arrangement.

Income from transferring cutting right or timber is declared in line 3.1.1 of form E and the Natura 2000 support for private forest land is declared in line 3.1.2 of form E. In addition to the Natura 2000 support for private forest land support, a sole proprietor can also receive other business-related support. That is also business-related income and must be declared on the income tax return form E.

Expenses related to business are declared in lines 3.2.1. to 3.2.11. Additional deductions are calculated in lines 3.4 and 3.5.

Other business-related forest management support must be declared in line 3.7 of form E. This is because no additional deduction can be made from other grants.

The final tax liability for the year is calculated on the basis of forms A and E of the income tax return in accordance with the tax rules for sole proprietors.

In the examples, we fill in part 3 of sole proprietor’s form E and also the last lines that cover the results of all three parts.

Example
A sole proprietor provided repair services for equipment used for forest management (fills in form E part 1) and also sold the right to cut his or her forest as well as received the Natura 2000 support for private forest land.

The result of part 1 of form E in line 1 (income – expenses) is 1 000 euros.

The sole proprietor received 10 000 euros from the transfer of cutting right as well as 2 000 euros of the Natura 2000 support for private forest land. The sole proprietor also received 3 000 euros in support for forest management under the Forest Act. The sole proprietor covered expenses related to forest management in the amount of 1 200 euros.

The 2 000 euros from the Natura 2000 support and the 3 000 euros of support received under the Forests Act were transferred to the special account of the sole proprietor.

From the previous year, the sole proprietor also had unused expenses in the amount of 800 euros to reduce the income carried forward (table 3 of Form E).

The sole income of the sole proprietor must be declared on form E (line 10). The sole proprietor has no taxable income on form A, but form A must still be submit.

Calculations of lines:
Line 3.4 = 12 000 – 1 200 = 10 800 > 5 000, which means one can use 5 000
Line 3.5 = 10 800 – 5 000 = 5 800
Line 3 = 3.5 line 5 800 + 3.7 line 3 000 = 8 800
Line 4 = 1 line 1 000 + 3R 8 800 = 9 800

Last updated: 19.08.2021

Was this page helpful?