A general introduction to the taxation of real estate investments in Germany

All the questions

Insight

i Real estate investment vehicles

Investments in German real estate can be made directly or indirectly. With regard to indirect investments, different investment vehicles can be used. The most common German vehicles are:

  1. German limited partnerships (GmbH & Co KG);
  2. German corporations (GmbH); and
  3. regulated German investment funds.

Real estate investment trusts (REITs) exist but are not very common in Germany. Instead of a German vehicle, foreign investors frequently use foreign limited companies (e.g. Luxembourg S.à rls), whose rental income is generally not subject to German business tax.

ii Property taxes

Real estate investments in Germany may be subject to various taxes.

Corporation tax and professional tax

Real estate income (in particular rental income and capital gains) is subject to income tax (at the rate of 45%, if it applies to individuals) or corporation tax ( at the rate of 15%, if applicable to companies); in both cases, a solidarity surcharge is imposed (5.5 per cent on the income tax due). In addition, business tax at a rate set by the municipality concerned (the average average in 2021 was 15.23%)2 becomes payable if the relevant real estate income is attributable to the German permanent establishment (PE) of a business enterprise (domestic or foreign), unless the extended business tax reduction applies. Business tax is not deductible for corporation tax purposes but can be deducted (up to a certain limit) from personal income tax.

Value added tax

Although the sale as well as the rental of real estate is, in principle, exempt from value added tax (VAT), the VAT exemption can be waived, subject to certain conditions (and is generally waived if the conditions are met), to facilitate the deduction of input VAT. As a general rule, the VAT rate applicable to the sale and rental of real estate is 19%. In certain circumstances, the sale of real estate may be considered a transfer of a going concern, in which case it is outside the scope of VAT.

Property transfer tax

While the direct acquisition of real estate is generally subject to real estate transfer tax (RETT), the acquisition or disposal of shares or interests in a real estate holding company or partnership triggers RETT. , in particular if (1) 90 percent (or more) of the shares or shares are, within a period of 10 years, transferred directly or indirectly to new shareholders or associates; or (2) a transaction results in 90% (or more) of the shares or interests being (directly or indirectly) owned by the same acquirer (or a group formed by the acquirer and affiliated entities). The law provides for certain (rather limited) exemptions, in particular for certain related party transactions and for listed companies.

The RETT rates are set by the state in which the property concerned is located and vary between 3.5% (in the states of Bavaria and Saxony) and 6.5% (in the states of Brandenburg, North Rhine -Westphalia, Saarland, Schleswig-Holstein and Thuringia).

Regulated investment funds

The acquisition or transfer of shares in a real estate investment fund under German law is generally not subject to RETT. The reason for this is that, from a legal point of view, real estate assets are generally not held by the investors in the fund, but rather in trust by the investment management company (i.e. the transfer or the acquisition of 90% or more of the shares of the asset management company triggers the RETT instead).

RETT reforms

The German legislator has, with effect from July 1, 2021, adopted a reform of the RETT law, which has led to the aforementioned 90% threshold (previously 95%) and the aforementioned 10-year period (previously five years). In addition, the aforementioned provision under which not only the transfer of 90% of the interests of a real estate holding company, but also the transfer of 90% of the shares of a real estate holding company within 10 years to several acquirers the RETT trigger is new. This new provision was designed to combat spin-off transactions where two acquirers together acquire 100% of the shares of a real estate holding company without one of them reaching the 90% threshold (previously 95%) . Such transactions had been described as “abusive” by politicians from almost all political camps.

Property tax

Property tax must be paid by owners of German real estate (and by holders of hereditary building rights). Liability is based on the estimated value of the real estate concerned, the applicable measurement factor (which depends on the type of real estate, for example, agricultural land, residential properties or commercial properties) and a multiplier set by the municipality concerned. .

On April 10, 2018, the Federal Constitutional Court declared unconstitutional the provisions on the valuation of real estate for property tax purposes. As a result, the legislator passed a reform which will come into force on January 1, 2025 and which provides for an assessment of real estate based on the fair market value, which is then multiplied by a uniform factor (called the basic federal rate ) and a multiplier determined by the municipalities. In addition, federal states will have the right – and several federal states have announced their intention – to opt out of the federal system and instead adopt their own property tax systems.

Inheritance and gift tax

In principle, the transfer and acquisition of assets cause of death or by gift is subject to German inheritance or gift tax if the transferor or acquirer is resident in Germany or if the property transferred and acquired qualifies as national property. This is the case for real estate located in Germany, but not necessarily for the shares of an entity that owns German real estate.