Investment in German real estate
von Peter Scheller
For foreign investors Germany’s real estate property is still attractive although property prices are still rising.
Foreign investors have to consider legal and tax issues in Germany. This article covers 10 main tax issues.
(1) German real estate and taxes
Foreign private investors have to observe the following taxes in Germany:
- Income Tax for individuals
- Inheritance and Gift Tax
- Value Added Tax
- Real Estate Transfer Tax
- Real Property Tax
Potential tax effects in the home country of the investor have to be considered as well. This applies especially for the income and the inheritance tax.
(2) Taxation of rental income
Rental income of private investors will be taxed in Germany at the regular progressive tax rate. The maximum rate is 45%. In addition the solidarity surplus charge of 5.5% of the income tax will be levied.
However, the taxation of rental income is in general moderate. German income tax law offers a relatively relaxed legal frame for allowances and deductible expenses. Expenses have to be connected to the rental income.
Deductible are for example the following allowances and expenses:
- Depreciations (amortisation) at a rate of 2% on the value of buildings,
- Finance costs (no matter whether the financing institute is a German or foreign) entity,
- Maintenance and reconstruction costs (only restricted in the first 3 years after purchasing the property),
- Travelling expenses (e.g. for business meetings with property managers, tenants or building companies),
- Expenses for administration and telecommunication,
(3) Tax on selling the property
Capital gains of private investors will be taxed in Germany at the regular progressive tax rate. Capital gains will be calculated as follows:
- Purchase Price,
- minus historical acquisition and production costs,
- minus selling costs.
The following has to be observed:
- Historical acquisition and production costs have to be reduced by depreciations which have been claimed by the seller,
- Historical acquisition and production costs will not be indexed. As a result inflation-related rises in the property value will be taxed in Germany,
- Capital gains will not be taxed in Germany if the period between acquisition and selling the property exceeds ten years.
(4) Double taxation
A double taxation scenario threatens if the home country of the investor taxes the rental income or capital gains from German sources. If a Double Taxation Convention is agreed between the home country and Germany a potential double taxation will be avoided or at least moderated.
In principle there are three scenarios:
- The home country does not tax German sourced income because of local tax regulations or a double taxation convention. There will be not double taxation, then only the German tax is due.
- The home country taxes German sourced income and credits the German income tax against its own tax. There will only be an extra tax burden if the foreign tax on German income is higher than the German tax.
- If the home country taxes German source income and does not credit the German tax against its own tax there is a double taxation scenario. In this case the investor has to look out for other tax saving solutions.
(5) Holding the property through a German company
This kind of corporate structure may have not tax-related reason such as limiting the personal liability of the investor or avoiding succession-related problems. However, there may also be a tax benefit. Profits of German corporations are subject to the German corporation income tax (flat rate 15%) plus solidarity surplus charge of 5.5% of the tax. The German trade or business tax can be avoided if the company’s only business activity consists of holding and managing German real estate. The effective tax rate is 15,825%.
If profits are to be distributed to its shareholders there is a withholding tax of 15% if the investor is a resident in a state which has a double Taxation Convention with Germany. The combined tax rate for the company and it’s shareholders will be 28.45%. This tax rate might be lower than the individual income tax rate for individuals, which can be up to 45%.
However, there is a drawback. The tax exclusion for capital gains after a period of ten years does not apply for companies.
(6) Holding the property through a foreign company
This kind of corporate structure may have certain benefits. Profits will be taxed in Germany at a rate of 15.825%. German trade tax will not be levied. Profit distributions will be taxed in the home country of the investor only.
The main reason for choosing the corporate structure could be the avoidance of German inheritance and gift tax.
(7) Inheritance and Gift Tax
German inheritance or gift tax will be levied if the decendant, donor or beneficiary is a tax resident in Germany. Since foreign private investors or their potential heirs are not tax residents in Germany, only the transfer of real estate or shares in companies situated in Germany will be taxed there. The main disadvantage for non-tax resident individuals is the very low personal allowance of 2,000 Euro. Combined with a progressive tax rate of up to 50%, the German inheritance tax burden can be severe.
The situation may increase if there is a double taxation. On one hand Germany has only a thin net of Double Taxation Conventions regarding inheritance or gift tax (six in total). On the other hand the tax systems regarding estate and inheritance taxes are extremely diverse. However, extreme tax burdens can be avoided by careful tax planning.
Note: The low personal allowance of 2,000 Euro has been dismissed several times by the European Court of Justice as not being in line with the European freedom right. However, German tax authorities still do not grant the much higher allowance for resident individuals. Therefore foreign investors must be prepared to fight for their rights in front of fiscal courts.
(8) Value Added Tax
In general renting and the selling of real estate is not subject to German VAT. However, it may prove beneficial to opt for VAT. This is for example the case if tenants are businesses who are entitled to reclaim input VAT. The option for VAT allows the landlord to reclaim input VAT on received services as well.
If real estate is purchased, both seller and buyer have be aware of the risks of input VAT adjustments. This is especially the case with commercial properties and office buildings.
Services which are not real estate related may be charged without German VAT (tax rate of 19%) to foreign investors, for example:
- Legal and tax advice
- Publication of property advertisements
- Advertising (even if related to real estate)
Under certain circumstances German service providers can avoid charging German VAT.
(9) Real Estate Transfer Tax
Subject to this tax is the selling or every other legal transfer of real estate, parts of it or similar rights. Tax base is the purchase price or any other benefit awarded for the transfer of the property. Tax rates differ from Federal state to state from 3.5% to 6.5%.
There are various tax exemption for example for inheritances, gifts or sales to spouses, civil partners or children.
(10) Real property tax
The real property tax is a municipal tax. Every city or municipality can determine its own collection rate. The tax is based on a historical taxable amounts. These amounts are based on the valuation ratio dated 1 January 1964 (west) or 1 January 1935 (east). Consequently the tax bases are very low which results in very moderate tax burdens.
|Einkommensteuer||Individual Income Tax|
|Körperschaftsteuer||Corporation Income Tax|
|Solidaritätszuschlag||Solidarity Surplus Charge|
|Erbschaft- und Schenkungsteuer||Inheritance and Gift Tax|
|Mehrwertsteuer (Umsatzsteuer)||Value Added Tax|
|Grunderwerbsteuer||Real Estate Transfer Tax|
|Grundsteuer||Real Property Tax|
Author: Peter Scheller, Steuerberater – Master of International Taxation
- German income tax
- income tax
- inheritance tax
- real estate
- real estate transfer tax
- Real property tax
- solidarity surplus charge
- Value Added Tax
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