Blog Overview

Current Trends in Tax Compliance for Real Estate and Private Equity

German tax law is in a constant state of flux; after months of coalition negotiations, the government is functioning once again, and 2018 sees another Annual Tax Act. It focusses, once again, on share deals in terms of both the land transfer tax and income tax. Key topics such as the appropriate rate of interest on shareholder loans (keywords: general group recourse), or the repayment of contributions from non-EU countries, have gained in momentum. In the area of the recognition of liquidation losses from equity investments held in private assets and losses from loans, the rulings of the German Federal Fiscal Court (BFH) show a positive trend. At the moment, there is also hope that the Federal Fiscal Court (BFH) will change its mind in the area of commercial infection. This article aims to highlight the key developments and their relevance for the practice.

Complete report for download

Parker Randall/ Real Estate Tax Compliance in Germany

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Accounting obligation of foreign real estate corporation

BFH I R 81/16 of 14/11/2018

In a recent judgement, the Federal Fiscal Court (BFH) confirmed the legal obligation of foreign real estate corporations to keep books of account (accrual based tax accounting).

Facts of the case (in brief):
The plaintiff was a public limited company under Liechtenstein law. According to the findings of the tax office, it had neither a permanent establishment nor a permanent representative in Germany. Thus, its only fiscal connection was the situs of a let property in Germany regularly leading to a limited tax liability for so-called fictitious business income under Section 49 (1) no. 2f of the Income Tax Act (since 2009).

The present dispute concerned whether an obligation indubitably existing under foreign law to keep books of account according to Section 140 of the General Tax Code (AO), which concerns accounting obligations ‘under other laws’, also covers foreign law. In its present judgement, the BFH answered this in the affirmative.

Comment by LM:
In the past, in determining the lettings income in cases of a limited tax liability arising from a let property located in Germany, the so-called cash-based-accounting method was usually applied.

This procedure was helpful for, among other things, controlling the interest paid (outflow principle in net income method) within the scope of the so-called interest cap (Section 8a of the Corporation Tax Act).

The BFH’s judgement is likely to be of only limited significance for current taxation practice, since the Federal Finance Ministry had also argued in favour of such an accounting obligation as early as in a letter dated 16 May 2011 (no. 3).

As a stop-gap, tax offices had required books of account, i.e. a tax balance sheet, at the latest when the turnover and profit limits under Section 141 of the AO had been exceeded. To that extent there is now legal certainty.

In practice, it is likely – not least for pragmatic reasons – that foreign annual accounts (where there is an accountancy obligation abroad on grounds of the legal form or size of a company) have as a rule been transitioned into German tax balances for some time. But the judgement also shows that merely copying a foreign balance sheet is not sufficient for German taxation purposes.

Your contact:

Mr. Thomas Jäger (Tax Advisor)

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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.

 Full press release German Federal Constitutional Court

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