Property tax: Provisions on standard rateable values for assessing property tax are unconstitutional

On 10 April 2018, the German Federal Constitutional Court (BVerfG) announced its decision in relation to standard rateable values for the assessment of property tax. The court ruled that the provisions of the German Valuation Act (BewG) for the standard rateable valuation of property in the states of former West Germany have been incompatible with the general principle of equal treatment, at least since the beginning of 2002. It has given the German legislature until the end of 2019 to introduce a new provision. The valuation rules that were deemed unconstitutional will apply for a further five years after that, but not after 31 December 2024 (BVerfG, judgement dated 10 April 2018 – one BvL 11/14, 1 BvL 12/14, 1 BvL 1/15, 1 BvR 639/11, 1 BvR 889/12).

Standard rateable values for property are still determined today in accordance with the German Valuation Act based on the valuation baseline of 1 January 1964. In the states of former East Germany, the valuation baseline is actually 1 January 1935. The German Federal Fiscal Court (BFH) concluded in its referral decisions (BFH dated 22 October 2014 – II R 16/13, BStBl [German Federal Tax Gazette] 2014 II p. 957; 22 October 2014 – II R 37/14 and 17 December 2014 – II R 14/13) that the standard rateable values for property are unconstitutional as they violate the general principle of equality (Art. 3 (1) of the Basic Law for the Federal Republic of Germany (GG)), at least since the valuation baseline of 1 January 2008 and/or 1 January 2009. The plaintiffs also essentially claimed a violation of their basic rights under Art. 3 (1) GG in their constitutional complaints (1 BvR 639/11 and 1 BvR 889/12).

The judges of the German Federal Constitutional Court also made the following findings inter alia:

  • The provisions of the German Valuation Act relating to the standard rateable values for property are incompatible with the general principle of equality. Art. 3 (1) of the Basic Law gives wide latitude to the legislature when it comes to setting out the details of valuation provisions regarding the tax base, but it requires a realistic valuation system as regards the relation of assets to each other.
  • The fact that the legislature continues to draw on the general baseline of 1964 results in serious and extensive unequal treatment in the valuation of property, which is not sufficiently justified.
  • The distorted values resulting from the overly long general baseline date are reflected in the individual valuation elements of both the rental value method (Ertragswertverfahren) and the capital value method (Sachwertverfahren).
  • The following applies for the continued application of the rules found to be unconstitutional: Firstly, the rules continue to apply for the standard rateable values assessed in the past and the collection of property tax based thereon. Beyond that, the rules will continue to apply in the future, initially until 31 December 2019, by which time the legislature must enact new provisions.
  • As soon as the legislature has enacted new provisions, the valuation rules deemed to be unconstitutional will apply for a further five years, but no longer than 31 December 2024 at the latest. The unusual decision to order continued application after the promulgation of new provisions is deemed necessary and therefore justified as an exception in light of the specific nature and complexities of property tax.
  • For calendar years from 2025 onwards, the Senate has ruled out property tax burdens based solely on final decisions on standard rateable values or property tax assessments from previous years.

Link to the full press release on the Website of the German Federal Constitutional Court ->

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Provisions on standard rateable values for assessing property tax are unconstitutional

Federal Constitutional Court, Press Release No. 21/2018 of 10 April 2018

Judgment of 10 April 2018

 

The provisions of the Valuation Act (Bewertungsgesetz – BewG) regarding the standard rateable valuation (Einheitsbewertung) of property in the former West German Laender are incompatible with the general guarantee of the right to equality, at least since the beginning of 2002. With regard to the valuation of property, the legislature continues to draw on the general assessment date (Hauptfeststellungszeitpunkt) of 1964. This results in serious and extensive unequal treatment, which is not sufficiently justified. Based on these reasons, the First Senate of the Federal Constitutional Court has declared the provisions unconstitutional in its judgment pronounced today, ordering that the legislature must enact new provisions by 31 December 2019. Until that date, the unconstitutional provisions may continue to be applied. After the new provisions have been promulgated, the old provisions may be applied for another five years from the date of promulgation, but not after 31 December 2024.

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Real Estate Tax Compliance – Current Focal Points from Recent Tax Audits

The management of single real estate properties through to extensive real estate portfolios is certainly a challenging task, and one which becomes more complex when taxation guidelines are to be taken into consideration. In addition to other factors, the recent administrative decree of the German Federal Ministry of Finance (BMF) concerning the differentiation between mere amendments of incorrect tax returns and a voluntary self-disclosure to the tax authorities of false or incomplete tax declarations in case of tax fraud, has seen tax compliance once again become the focus of all participants. Tax practice has shown that pitfalls are to be found in several places, and that the best tax-structure memo cannot provide any guarantee for a life without tax worries if circumstances change later or new circumstances arise, or the original legal or tax guidelines are not carried out properly.

The following report in the Financial Year Book 2018 aims to highlight key focal points from tax audits with which we have been entrusted, and therefore offer proposals for possible solutions at the same time; in this respect, we assume an inbound scenario in which real estate located in Germany is held by domestic or foreign property companies.

Complete report für download (PDF/176KB)

Parker Randall/ Real Estate Tax Compliance in Germany

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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

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 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

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.