Holding real estate in Germany

Fund Structures and German Taxation at a Glance

Although decisions on investments in real-estate are not primarily tax driven, taxation plays an important roll. Not only the recent BEPS discussion but also further aspects of transfer-pricing, interest deduction and loss utilization play an increasing role in international tax structures.
Last but not least another important intention when administrating real estate is to hold the Propco free of German trade tax which can occur under specific circumstances.

The purpose of this document is to provide an overview – at a glance – of major tax aspects which are relevant for international investors planning to invest in German real estate.

LM as an independent accounting, auditing, tax compliance and law firm has a strong focus in real estate for many years thus enabling us to cover the full life-cycle of an asset. Due to our comprehensive relation-ships to various service providers in the field of real estate such as law firms, property managers and last but not least accounting & domiciliation providers domiciled in other jurisdictions such as Guernsey or Luxembourg we are in the position to serve as a one-stop-shop to drive your real estate project to success.
We will treat your real estate as if it was our own!

Should you seek for further assistance please do not hesitate to contact us.

Schlagwörter: Real-Estate/ Internationales Steuerrecht

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How to achieve a refund of land tax on real estate in case of vacancies?

Refund of property tax on real-estate according to the Federal Real Estate Tax Act

Real estate lessors whose property is vacant for a longer period can reclaim a part of their paid property tax on real-estate.

 

How to apply for the refund of property tax on real-estate?

The major requirement for the refund is a significant drop in rent income – mostly triggered by vacancies – which besides must not be provoked by action of the real estate owner. The benchmark for such reduction in rent income is the common rent for assets of same type, location and fitting. Therefore the refund is not granted in case the lessor terminated the rent contract during the relevant period i.e. with the target to execute an asset refurbishment. Requirements are subject to a close review of the tax authority.

Furthermore the lessor must prove that he has undertaken action to achieve a letting at a market oriented price. Documentation at an early stage of the attempts to find new tenants is highly recommended.

 

Which form and due time need to be considered for the application?

The request for the refund of the property tax on real-estate can be made informally at the municipal town or city authorities.

In the federal city states Berlin, Bremen and Hamburg the application should be addressed to the tax authority. The deadline – which cannot be extended – is always the 31st March of the following year. An extension of the deadline is impossible (cut-off date).

 

How much will be refunded?

In case that the reduction in rent-income is more than 50% a 25% discount of the property tax on real estate will be granted. If the asset was completely vacant in the relevant period 50% of the property tax on real estate will be refunded.

Contact:

Thomas Jäger, Partner, Tax Advisor

Robin Friedrich, Auditor, Tax Advisor

 

 

Tags: property tax on real-estate, vacancy, real estate tax, Real Estate

By Thomas Jäger, Partner, Tax Advisor, Robin Friedrich, Auditor, Tax Advisor, published 2014-02-24

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How to achieve refund of capital gains tax on dividends from minority shareholdings?

A European Court of Justice ruling in October 2011 (case C-248/09) has opened up the possibility of certain “old cases” becoming eligible for a refund of German capital gains tax. This applies to corporations with a limited tax liability which have their principal place of business and management in an EU/EEA state and no more than a 10% shareholding in domestic corporations. This possibility of a refund derives from the new regulation governing the taxation of what are referred to as free-float dividends, but only concerns those taxes on dividends received up to the 28th of February 2013.

 

Generally speaking, an informal application for a refund can be submitted to the German Federal Central Tax Office, but it must be accompanied by proof of compliance with the following criteria:

  • unlimited tax liability in the state the corporation is domiciled (place of management);
  • direct participation in the stock or nominal capital of the distributing company;
  • the corporation applying for the refund is the actual recipient of the dividends (shareholder) and the dividends are attributed to it for tax purposes;
  • the entitlement to a refund must not be excluded under Sec. 50d para.3 of the German Income Tax Act (the company applying for the refund is commercially active and neither natural persons nor third-country nationals have a shareholding in it);
  • no refunds are possible under other regulations (e.g. double taxation agreement);
  • in the state where the company is domiciled, the German capital gains tax may neither be attributed to the corporation submitting the application or to its shareholders, nor may it be deducted as an expenditure.

If the prerequisites are fulfilled, the capital gains tax is refunded based on a notice of exemption for all profit payments disbursed in a calendar year. The fulfilment of the above prerequisites shall be demonstrated by a certificate of the foreign tax authority. The limitation for applications for previous years is based on the general period of limitation applicable to taxes (four years).

According to our information, the German Federal Central Tax Office is currently preparing an appropriate form which can be submitted to the foreign tax office in order to certify that the above criteria are fulfilled. It remains to be seen when this form will be available and how the foreign tax offices will respond to it.

 

Contact:

Thomas Jäger, Partner, Tax Advisor

Ulrike Schmid, Tax Advisor

 

Tags: tax advice, capital gains tax, minority shareholding

By Thomas Jäger, Partner, Tax Advisor, Ulrike Schmid, Tax Advisor, published 2014-02-14

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How to benefit from lower rates despite increases in real estate transfer tax (RETT)?

As Germany’s federal states continue to increase real estate transfer tax (Grunderwerbsteuer), many companies – especially those planning to purchase real estate at year end – are keen to find out what they can do to benefit from the old (lower) tax rates.

 

Real estate transfer tax (Grunderwerbsteuer) in Germany was originally set at 3.50%. Since September 1, 2006, however, the country’s individual federal states have been able to set their own real estate transfer tax rates. For many states, this has become a lucrative source of income. And so it seems that these increases are set to continue. Berlin, for example, aims to raise its real estate transfer tax rate to 6.00% as of January 1, 2014. In fact, Saxony and Bavaria are the only states that have kept real estate transfer tax at 3.50%. However, it can only be a matter of time before these last two states also raise their rates.

 

Table showing current and planned real estate transfer tax rates:

 

 

If the individual federal states continue to increase tax rates, companies must take appropriate steps to minimize the impact on planned real estate transactions. A company planning to make a transaction subject to real estate transfer tax can reduce the tax burden by ensuring that the taxable transaction is realized in good time.

 

Real estate transfer tax is generally due when the purchase is realized. In most cases, this is upon execution of the notarized contract of purchase. The actual transfer of ownership, benefits and encumbrances, which usually takes place at a later date, as well as the date on which the purchase price is paid and the transfer is entered in the land register are therefore irrelevant. It is important to note, however, that real estate transfer tax is not generally triggered when a letter of intent or option rights are agreed or granted. The tax is only applicable when these options are exercised.

 

The following information is particularly relevant in relation to the most common conditions stipulated in contracts of purchase:

 

If a federal state is planning to increase real estate transfer tax, the date of the change and performance of the legal transaction are the most important factors. The regional tax offices of Rhineland and Münster issued guidelines on this on August 16, 2011. According to this information, the date on which the purchase contract is certified by a notary plays a defining role in the sale of real estate; in other words, the determining factor is whether the transaction is certified before or after the date the tax change enters into effect. This said, each case is individual and every company needs to exercise caution. If, for example, a contract contains a condition precedent or is subject to a specific approval, the real estate transfer tax is generally deferred until the condition has been met or the approval given. In the view of the financial authorities, the tax often only becomes applicable once the condition that enables the purchase transaction to be carried out has entered into effect.

 

On July 29, 2013, however, the Fiscal Court in Düsseldorf ruled that real estate transfer tax triggered at the time a condition was met was nonetheless to be paid at the rate applicable at the time the contract was concluded. In this particular case, a contract was concluded in 2004. Part of the purchase price, however, was dependent on approval to be granted by public authorities. This condition was not met until 2012. Although the real estate transfer tax rate had increased by this time, the Fiscal Court ruled that the tax should be paid at the rate applicable at the time the contract was certified by the notary in 2004.

 

Conditions subsequent are the only conditions that do not have a restrictive impact on the purchase transaction. In the case of a condition subsequent or the agreement of withdrawal rights, the real estate transfer tax becomes chargeable once the notarial purchase contract is concluded. Similarly, the tax debt is not deferred if a contract contains a postponement clause. In other words, real estate transfer tax also usually arises in this instance at the time the contract of purchase is certified by the notary.

 

In this regard, it should also be noted that if a completed purchase transaction is rescinded, the tax can be lowered on request, provided that the reduction takes place less than two years from the time at which the tax became applicable. This is also the case if the purchase price is reduced at a later date, for example, if conditions are not met. If conditions that reduce the purchase price enter into effect over an extended period, the purchaser should take steps to ensure that the real estate transfer tax is provisionally assessed in line with § 165 of the German General Tax Code (Abgabenordnung). Furthermore, the regulations governing retrospective tax reduction following a drop in the purchase price or the rescission of a purchase only apply if the purchase has been duly reported to the fiscal authorities. This important step is sometimes neglected, especially if a company “indirectly” purchases real estate following the acquisition of shares in companies that own real estate.

 

Summary:

When a company finds a property it wants to purchase, it should sign the notarized contract sooner rather than later. As a rule, the date of the notarized certification is the deciding factor when assessing the tax burden – and not the transfer of benefits and encumbrances and so it is irrelevant if this takes place at a later date. Parties can draft contractual conditions to protect themselves against any uncertainties they may still have about the purchase at this time. There is no way of avoiding real estate transfer tax, however, by drawing up contracts in good time, you can eliminate additional costs resulting from changes to the tax rate.

Contact:

Thomas Jäger, Partner, Tax Advisor

 

 

 

Tags: Real Estate, Taxes, real estate transfer tax

By Thomas Jäger, Partner, Tax Advisor , published 2014-02-13

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How can foreign investors structure an acquisition in Germany?

The acquisition in German companies can be structured directly as asset deal or indirectly by acquiring shares in a legal entity (share deal).

Tags: Share deal tax, Asset deal tax, Purchase price agreement

By Robin Friedrich, Auditor, Tax Advisor, published 2014-01-17

 

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VAT What are the new Europe-wide registration requirements for the provision of company cars?

If a firm provides a company car to an employee for private use (private trips, trips from the employee’s home to the workplace, trips home to visit family), this will be subject to VAT. According to the German Federal Ministry of Finance (BMF) the provision of the vehicle should generally (as part of the work remuneration) be deemed to be  a paid service liable to VAT (cf. BMF ruling letter dated August 27, 2004). In this context, the rules relating to the definition of the place of performance have now changed.

Exception:

According to the BMF (letter dated August 27, 2004), it can be assumed in exceptional cases that the provision for use is an unpaid service if private use is limited to such an extent that it does not have a financial impact on the salary assessment. This may only be assumed if the employee is provided with a company car for private use for a special occasion or special purposes and only occasionally (i.e. not more than 5 calendar days within any one calendar month). In these cases the place of performance for the provision of benefits in kind shall continue to be based on the firm’s (employer’s) place of business or the latter’s permanent establishment (Section 3f of the German VATA (USTG).

1. Previous regulation governing the (paid) provision of company cars

The place of performance with respect to the provision of vehicles to non-firms was previously based on the company’s head office or principal place of business (Section 3a para. 1 of the German VATA). Therefore, the private use of a company car by the employee has thus far been subject to VAT at the company’s place of business or permanent establishment.

2. New regulation governing the (paid) provision of company cars

With the Mutual Assistance Directive Implementing Act (AmtshilfeRLUmsG), a new regulation governing the place of performance was introduced for the long-term rental of transportation means to non-firms. In these cases, the place of performance is now based on the beneficiary’s residence or place of business (Section 3a para. 3 no. 2 of the German VATA, latest version). This new regulation has been in place since June 30, 2013.

With its regulatory letter dated September 12, 2013, the BMF has clarified that the provision of a company car to an employee for private use is now also deemed to be a paid rental of a transportation means in accordance with the regulations. The new regulation thus also applies to the levying of VAT on the private use of company cars.

Therefore, if an employee is provided with a company car for private use (private trips, trips from home to the workplace, trips home to the family), the place of performance shall now be based on the employee’s residence.

In the case of the provision of a company car by a German firm to an employee residing within Germany this is not a problem since the VAT continues to be levied in Germany.

3. Cross-border provision of company cars

The levying of VAT on the provision of company cars is not regulated in a uniform manner across the EU. With respect to the cross-border provision of company cars this may lead to conflicts with applicable regulations in other countries.

3.1. VAT approach according to German law

According to the new German regulation, the provision for use in the applicable country of residence is subject to VAT. If the employee is residing abroad, the firm in Germany must register for VAT in the employee’s country of residence and pay VAT there. In this case no VAT is payable in Germany.

On the other hand, foreign firms must register for VAT in Germany if an employee residing in Germany is provided with a company car for private use.

3.2. Possible conflicts in the case of diverging rules outside Germany

The change of the place of performance to the employee’s residence derives only from the fact that the provision of the company car qualifies, according to the German fiscal authority, as a paid rental service. In countries where the provision of a company car is not deemed to be a rental transaction, the place of performance is, by contrast, based on the employer’s place of business. In principle this may lead to the following situation:

  1. The private use of the company car is not subject to taxation as each country assigns to the other country the right to levy sales tax.
  2. Double taxation occurs as the private use is subject to VAT in both countries.

Example:

Provision of a company car by a German firm to employees residing abroad: According to German law, such private use shall be taxed in the country of residence. However, notwithstanding German law if in the country of residence the firm’s place of business is deemed to be the place of performance, no VAT is levied in either country. On the other hand, if a company car was to be provided by a firm outside of Germany to an employee residing in Germany, both countries would levy VAT on such private use.

In some countries there is either no or only limited VAT deduction for vehicle expenditure, with no VAT being levied on private use. In principle, this may also lead to either of the following situations:

  1. The private use of the company car is not subject to taxation since such private use is not subject to VAT in one country, although the other country has granted VAT deduction on expenses related to the use of such cars.
  2. The private use of the company car is subject to double taxation since VAT is levied on such private use, although the other country does not grant VAT deduction on such car related expenses.

Example:

Provision of a company car by a German firm to employees residing abroad: Even if, notwithstanding the German regulation, VAT was not to be levied on any private use in another country, the tax deduction would be maintained in Germany. On the other hand, if a foreign firm was to provide a company car to an employee residing in Germany, Germany would, as the country of residence, levy VAT on any private use, even if no VAT deduction could be asserted in the other country.

In such cases it is recommended that the vehicle expenditure be born and declared in the country in which no VAT deduction ban exists.

However, it can be assumed that individual countries will respond differently to the possibility of non-taxation, due to the different rules in place. For example, in Austria – where the provision of a company car is normally not subject to taxation, since there is a tax deduction ban for vehicle expenditure – a draft proposal was recently drawn up, according to which the provision of a company car by a German firm is, according to the German interpretation of the law, deemed to be a paid long-term rental service and thus subject to VAT. In the reverse case, i.e. taxation of the provision of a company car in Germany, the tax deduction ban, however, will be maintained based on the current legislation.

Contact:

Thomas Jäger, Partner, Tax Advisor

Wolfgang Störringer, Tax Advisor

 

 

Tags: German tax rules

By Thomas Jäger, Partner, Tax Advisor, Wolfgang Störringer, Tax Advisor, published 2013-10-21

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Foreigners moving to or working in Germany

German taxation of individuals – an overview provided by LM.

Tags: German tax rules, individuals, income tax

By Michael Leinauer, Partner, Auditor, Tax Advisor, published 2013-06-18

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Taxation of sales & services and real estate in Germany

VAT, RET and RETT in Germany – an overview provided by LM.

Click here to download (pdf, 700 kB)

Contact:

Michael Leinauer, Partner, Auditor, Tax Advisor

 

Unsere News geben Veröffentlichungen jeglicher Art nur auszugsweise wieder. Für Informationsfehler können wir daher trotz Sorgfalt keine Haftung übernehmen. Individuelle Beratung im Einzelfall kann dies nicht ersetzen. Auf Inhalte von Internetseiten, die wir verlinkt haben oder auf die wir hinweisen, haben wir keinen Einfluss. Eine Haftung hierfür wird daher ausgeschlossen.

Foreigners investing in German companies

German tax rules for corporations and partnerships – an overview provided by LM.

Tags: German tax rules, corporations, partnerships

By Michael Leinauer, Partner, Auditor, Tax Advisor, published 2013-06-18

Unsere News geben Veröffentlichungen jeglicher Art nur auszugsweise wieder. Für Informationsfehler können wir daher trotz Sorgfalt keine Haftung übernehmen. Individuelle Beratung im Einzelfall kann dies nicht ersetzen. Auf Inhalte von Internetseiten, die wir verlinkt haben oder auf die wir hinweisen, haben wir keinen Einfluss. Eine Haftung hierfür wird daher ausgeschlossen.

New taxatation for free float dividends starting 28 February 2013

Previously, dividends distributed from one corporation to another were 95% tax exempt for the shareholder, pursuant to § 8b Abs liVm Abs. 5 KStG.

This regulation was in contradiction with European law, where dividends from German corporations distributed to foreign corporations are taxed at 25% as capital gains, pursuant to § 32 Abs. 1 KStG, provided that the foreign corporation has less than a 10% stake in the distributing corporation.  In this case – in accordance with the Parent-Subsidiary Directive – no capital gains tax in Germany is levied.

In order to overcome the disadvantages of corporations in other European countries, § 8 Abs. 4 KStG was enacted, which introduced full taxation on free float dividends (i.e., holdings with less than 10% at the beginning of the calendar year). For indirect shareholdings of other companies, which are owned by partners, the rate depends on the proportional ownership interest of each co-owner.

The same applies to shares of other companies in asset management partnerships, as is often the case with private equity funds.

This regulation applies to all free float dividends received after 28 February 2013. The taxation of capital gains from the sale of free float shares does not differ from the new legal provisions for the taxation of dividends. Capital gains remain 95% tax exempt.
(Source: Implementation Act of the European Court of Justice ruling of 20 October 2011 in case C-284/09)

Contact:

Michael Leinauer, Partner, Auditor, Tax Advisor

Tags: tax advice

By Michael Leinauer, Partner, Auditor, Tax Advisor, published 2013-05-01

Unsere News geben Veröffentlichungen jeglicher Art nur auszugsweise wieder. Für Informationsfehler können wir daher trotz Sorgfalt keine Haftung übernehmen. Individuelle Beratung im Einzelfall kann dies nicht ersetzen. Auf Inhalte von Internetseiten, die wir verlinkt haben oder auf die wir hinweisen, haben wir keinen Einfluss. Eine Haftung hierfür wird daher ausgeschlossen.