Property investments are currently booming with both institutional investors and private investors. The market is benefiting from the current low interest rate phase and the good economic development in Germany. Office and residential real estate in the big cities are especially popular. While the residential property market is dominated by German investors, nearly half of the buyers of commercial real estate are foreign investors. However, an investment in German property must be carefully planned in order to avoid an unnecessary tax burden when buying, during the holding phase and when selling.
- Principle: Taxation of profits and income in Germany
Income from renting or leasing German real estate assets is generally subject to income taxation in Germany. If the investors are natural persons, rental and lease income is calculated as the excess of revenue over income-related expenses. This surplus is then subject to the individual, progressive tax rate. In the case of investments through corporations, rental income is subject to corporation tax in the amount of 15 %. In addition, corporate entities and commercial partnerships are subject to trade tax ranging between 7 % and 17 %.
The income that international investors earn from the leasing of German real estate is also subject to taxation in Germany in the context of limited tax liability. If there is a double taxation agreement between the country of residence of the investor and Germany, then the right of taxation is generally assigned to the country in which the property is located, i.e. Germany. If the property is held directly by a foreign corporation, this does not constitute a permanent establishment in Germany. It is important here that the foreign company does not have its management in Germany. If no domestic permanent establishment is formed, in principle no trade tax is due in Germany. However, special care should be taken when commissioning a domestic service provider (asset manager, property manager, facility manager) to manage the property, as this, if equipped with extensive decision-making powers, can constitute a permanent establishment.
- Special feature: The extended trade tax reduction
A special feature of the trade tax is the so-called extended trade tax reduction. This is applicable if the company exclusively manages and uses its own property. As a result, asset management corporations that are subject to trade tax based on their legal form are exempted from this additional tax burden and are thus treated equally to asset management partnerships. Any secondary activities are harmful and constitute grounds for denial of a potential tax reduction. In this context, particular attention must be paid to the harmful renting of so-called operating equipment (e.g. goods lift) or inventory.
- Real estate transfer tax pitfall
Transfers of real estate in Germany are subject to real estate transfer tax. Depending on the state, this amounts to between 3.5 % and 6.5 % and is generally based on the purchase price. However, it should be noted that even the direct or indirect transfer of shares in a property holding company or a change of ownership in a property holding partnership may trigger real estate transfer tax. For this reason, increased attention must be paid to property holding companies, especially in the case of restructuring.
In summary, it should be noted that flexible taxation structures are available with respect to real estate investments. This means that unnecessary tax burdens can be avoided when taking the applicable legal provisions into account. In any case, in the event of real estate transactions or restructuring within a group which holds German real estate assets, tax advice should be obtained in order to enable a tax-optimized structure.
