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Germany

Contents

1. Introduction – why buy real estate?

2. Contact details

3. Forms of property ownership

4. Taxes and other costs on property acquisitions

5. Issues during Ownership

6. Disposal of property

7. Non resident owners of property

8. Sundry issues


1. Introduction - Germany

There are several reasons as to why a person would buy or build property in Germany. Amongst them are the following:

• Investment: Real estate is an important and necessary asset in any diversified portfolio. This applies to private persons as well as to institutional investors. Furthermore as of January 2008 special tax rules now apply for real estate investment trusts.

• Owner occupation: There are two main aspects to buying property in Germany; first to use as a holiday home and second to reside permanently in Germany.

• Business use: If a foreign company intends to set up a subsidiary or a permanent establishment in Germany, it could be advantageous to buy or build their business premises instead of leasing them.


2. Contact Details

Mr Carsten FrankeEbner Stolz Moenning BachemTel.: 0049 40 370 97 – 169Email: [email protected]

Mr Sten GuenselEbner Stolz Moenning BachemTel.: 0049 711 2049 - 1258Email: [email protected]

mailto:[email protected]

mailto:[email protected]


3. Form of property ownership

The main forms of property ownership in regards to both private persons and companies are:

• Freehold• Leasehold• Rental• Statutory heritable building right (“Erbbaurecht”)


4. Taxes and other costs on property acquisition

There are four important matters of expenses which must first be considered by the purchaser of German property.

• Real property transfer tax (“Grunderwerbsteuer”)

In general, subject to the real property transfer tax is the transfer of ownership with some exceptions. In January 2006 the federal states were being granted authority to autonomously determine the real property transfer tax rate. Nevertheless in practice the real property transfer tax rate amounts to 3.5 % of the assessable property value. Exceptions can be seen for example in Berlin and Hamburg where the tax rate has been increased to 4.5 %.

Notwithstanding any agreements to other effect the real property transfer tax must be paid in half by the buyer and in half by the seller. However in practice, it is normally agreed, that the purchaser pays the entire real property transfer tax.


4. Taxes and other costs on property acquisition (cont’d…)• VAT (“Umsatzsteuer”)

Usually, the acquisition of property is exempt from VAT. However, if the seller and the buyer are both entrepreneurs, the option of VAT can be utilised, so that the sale is subject to 19% VAT. The exercise of this option may be advantageous for the seller to avoid input VAT repayments in some cases; the buyer is likely to agree on this if he is able to claim the VAT from the purchase as input VAT.

If the buyer is a private person, the acquisition is always exempt from VAT.

• Cost for notary and entry in land registerThe cost for the notary and for the land register entry amounts to approximately 0.5 - 2 % of the purchase price. The cost is dependant on several factors (for example entry of a mortgage) and must be paid usually by the buyer.

• Estate agent fees (Maklergebühr)Estate agent fees (also known as ‘courtage’) are often calculated at about 5 – 7 % of the purchase price. The fees are not regulated by law and as such are negotiable.


5. Issues during ownership One must always distinguish the use of the property for private, business or rental purposes. • Private residential use / rental use

The German property could basically be used for two purposes. On the one hand it could be used for private residential purposes (for example as family home or as a holiday house). In this case German income tax would not apply.

On the other hand the German property could be used by a private person for achieving rental income. The rental income is subject to income tax. The rental income will be assessed at revenues basically less cost for building depreciation (2% p.a.), operation, maintenance and interest.

• Business use / rental use within a business

On the one hand the property can be used as business premises. In this case the business activities on the property usually create a permanent establishment in Germany.

Furthermore the property can be used for rental purposes within a business. If the German property is used for rental purposes within a business the income is subject to income tax. The rental income is determined as the difference between the rental revenue and the deductible business expenses (for example interest cost within the interest deduction limitation, depreciation, operation, maintenance costs, etc.) on an accrual basis. The building may basically be depreciated over its expected life-span (usually 3 % p.a.).


5. Issues during ownership (contd…)

The German tax burden depends on the legal form of the investor. If the owner of the German property is a corporation the realised rental income is subject to corporate tax as well as, in most cases, trade income tax. The corporate tax rate amounts to 15 % plus 5.5 % solidarity surcharge thereon. The trade income tax depends on the municipal rate fixed by the municipality, the average trade income tax rate amounts to 14 %. Altogether, the average nominal tax rate of corporations would be approximately 30 %.

If the activities of the Corporate Investor are limited to the management of property assets and if the Corporate Investor elects to do so, he may enter the so called “extended exemption regime“ (erweiterte Grundstückskürzung) and therefore avoid paying trade income tax. The exemption is only applicable if the investor would be considered as ‘not in the business of trading in real estate’.

• Real estate taxProperty owners will be charged with real estate tax every calendar year. The tax amount is calculated as the sum of assessed value multiplied by the tax rate (2.6 ‰ - 6.0 ‰) and the municipal rate fixed by the municipality (usually between 350 % - 550 %). In the case of the use for business or rental purposes the real transfer tax is deductible for income tax matters.

• Net wealth tax („Vermögenssteuer“)Net wealth tax has not been levied since 1997.


6. Disposal of property

The capital gains from the disposal of property are usually subject to corporate or income tax. A capital gain is calculated as the difference between the property’s purchase price and its book value plus any disposal costs.

In cases where the seller is a private person the tax liability of a capital gain from the disposal of German property is dependent on how the property has been used by the seller. If the property has been used by the owner for own residential purposes the capital gain is usually tax exempt. If this is not the case then the capital gain is subject to income tax plus solidarity surcharge thereon (maximum nominal tax rate would be 47 %) within 10 years after acquisition.

If the seller is a corporate investor then the capital gain from the disposal of the property is subject to a corporate tax rate of 15.82 % (including solidarity surcharge) as well as, in usual circumstances, trade income tax. As a result the capital gains are subject to an nominal tax rate of approximately 30 %. Under certain circumstances the trade income tax may be avoided there the seller successfully enters the “extended exemption regime” (see section 5.2). For the taxation of non resident corporate investor see section 7.

Furthermore, provisions for roll-over relief exist in Germany for businesses so that the taxation of the capital the capital gain from the disposal of German property may be avoided for a period of time. However it must be recognized that the utilization of the German roll-over relief system is dependant on the fulfilment of strict conditions.


7. Non resident owners of property

The following description highlights the distinction between a direct investment in Germany by a private person and by a corporate investor. In both circumstances it is assumed that no German subsidiary has been or will be established in Germany due to the investment. Both the private investor and the corporate investor are subject to limited tax liability.

In cases where the property has been rented out by a private person the revenues minus the tax deductible expenses (e.g. depreciation, operation, interest, maintenance) is subject to German income tax plus solidarity surcharge. The maximum tax rate for a single individual as of 2009 is about 47 %. The rental income is calculated on a cash basis and the foreign investor is obliged to file a tax return in Germany.

Concerning the taxation of capital gains from the disposal of property, there are no differences to the taxation regulations attached to of a resident owner (therefore see section 6.)


7. Non resident owners of property (contd…)

The Corporate Investor is subject to limited tax liability with respect to all the rental income and capital gains resulting from the use and sale of the German property. Unless the Corporate Investor does not have a permanent establishment in Germany the realized rental income is only subject to corporate income tax and solidarity surcharge. Under German law, a permanent establishment of the corporate investor is established if it has a fixed place of business in Germany which serves its business activities. Usually, the Corporate Investor does not create a permanent establishment in Germany if it merely holds legal title to German property which is leased to third party.

Taking effect from 1 January 2009 rental income of corporate investors will be calculated on an accrual basis. As mentioned above the Corporate Investor can deduct certain expenses as long as they have been incurred in relation to the rental income.

In general, interest costs are deductible. However, as from January 2008 the interest deduction limitation also applies to non-resident corporate investors. Accordingly, the tax deducibility of interest costs may be limited to 30 % of the taxable EBITDA if the net interest costs are higher than EUR 1 million (minimum threshold) and the corporate investor is part of a companies group.


8. Sundry issues

Since the beginning of 2008 property investments in Germany can be conducted via German Real estate investment trusts (GREIT). The purpose of the introduction of the GREIT was to attract property investments to Germany by using the international accepted vehicle of a REIT. The GREIT should enable property fund raising on a broad basis. A GREIT is a stock corporation listed at the stock exchange. The GREIT can be tax favourable if certain conditions are met.

The German double taxation treaties usually grant the right to tax to the state of source. Double taxation then will be eliminated for some countries by the credit method whilst for others by the exemption method.

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