Explained below are relevant German taxes and vehicles suitable for investing in German property and the tax consequences of buying, owning and selling real estate.
The income tax in Germany is levied on the income of individuals and partnerships, and the corporation tax is levied on the income of legal persons, such as companies. Income tax and corporation tax returns must be filed by 31 May following the end of the tax year, but extensions are not uncommon, especially if the taxpayer is being advised by a tax consultant.
Germany charges tax on seven categories of income:
For the purpose of determining the type of income derived from real estate, German tax law distinguishes between real estate that constitutes a business asset and real estate that is held as a private asset. Real estate may also be divided into parts that can be taxed differently. If real estate forms part of business assets, the current profits as well as any capital gains are subject to tax. On the other hand, expenses relating to such real estate are always treated as deductible business expenses.
All income derived by corporations (limited liability companies and stock corporations) is treated as business income. These companies only have business assets.
For business assets, the rate of depreciation is usually 3%. For other assets, the rate is 2% or, in case of new buildings, 4% for nine years then lower rates for the remainder of the depreciable period.
Income from real estate as a private asset constitutes rental and leasing income. The main difference in real estate held as a business asset is that only the current income is taxable, not the change in the real estate’s value. Only the profit of the income source is taxable, not the source itself. ‘Other income’ includes private capital gains, which are taxable if the real estate was held for less than ten years.
German tax law distinguishes between resident and non-resident individuals. An individual is a resident if he has his domicile or habitual residence in Germany; his citizenship is irrelevant in this regard. A corporation is a resident if its management or legal seat is located in Germany. A non-resident is subject to ‘limited tax liability’; in other words, subject to tax on German-based income only (for example, income from real estate situated in Germany).
Non-resident investors may however be required to declare German income and gains in their country of residence. In order to avoid the double taxation of this income Germany has concluded a number of double taxation agreements with other countries.
The progressive rates of personal income tax effective from 1 January 2005, range from 15% to 42% for all types of income. However, a minimum tax rate of 25% generally applies to the income of non EU resident individuals.
From 1st January 2008, the corporation rate shall be reduced from 25% to 15%. In addition there is a solidarity surcharge of 5.5% on the income, and corporation tax liability.
Under the concept of the shareholder relief system (half-income method), only half of the dividends received by individuals are taxable.
Effectively, only 5% of dividends distributed to a resident corporation are subject to corporation tax.
A person that owns a business in Germany is subject to the local business tax (Gewerbesteuer), which applies to resident individuals and corporations as well as non-residents that conduct business in Germany through a permanent establishment. The local business tax is basically levied on business income with certain adjustments.
A non-resident without a permanent establishment in Germany generally derives rental income or other income from real estate. An exception applies, however, if the person is deemed to be ‘dealing in real estate’, in which case the income from real estate constitutes business income.
The basic rate of the local business tax is 5%, multiplied by 300% to 515%, depending on the municipality in which the business is situated. The local business tax is a deductible expense for its own purposes as well as for income tax and corporation tax purposes as well as for income tax and corporation tax purposes; hence the effective rate is reduced.
The transfer of German real estate is subject to the real estate transfer tax (Grunderwerbsteuer), From January 1 2014 real estate purchased in Berlin will be subject to a transfer tax at a rate of 6.0%.
The tax is generally imposed on any obligation to transfer, sell, or exchange real estate. Both the seller and the purchaser are liable for the transfer tax, but in most cases the parties agree that the purchase will pay the entire tax. The taxable base is the transfer value of the real estate (e.g. the purchase price). The tax authorities may not adjust the price upwards if it is below the market value.
If the transfer results from a merger, or if shares are transferred to a single owner, the tax is based on the ‘Grundbesitzwert’, or the value calculated as its earnings potential, which is approximately 50% to 60% of the fair market value.
Real estate is subject to a local real estate tax (Grundsteuer), levied annually. It is deductible in calculating the net taxable income from real estate for income and corporation tax purposes. The taxable base is the ‘assessed value’ (Einheitswerf), which is generally about 10% to 20% of the fair market value. The basic rate of the real estate tax is 0.35%, but different rates (0.26% to 0.60%) apply to specific types of real estate. The tax rate is multiplied by the municipal coefficient (from 300% to 600%).
Inheritance and gift taxes (Erbschaft- and Schenkungsteuer) apply to the transfer of assets on death and gifts during lifetime. Both are taxed in the same manner and as identical rates. The taxable base for real estate is the ‘rent-based assessed value’ (Grundbesitzwert), 50% to 60% of the fair market value. Borrowings relating to taxable assets are fully deductible.
The tax rates are progressive and range from 7% to 50%, depending on the size of inheritance of gift and the relationship of the beneficiary to the donor. The closer the relationship is between the both, the lower the tax and the larger the allowance. The allowance generally ranges from 5,200 to 307,000EUR (e.g. 205,000EUR for a child and 307,000EUR for a spouse).
The tax has a ten year accumulation period, which means that assets received during the previous ten years are taken into account. The allowance revives after ten years.
Please note there is an allowance of 1,100EUR for non-residents
Transfers subject to inheritance and gift taxes are not subject to the real estate transfer tax.
If a resident or non-resident individual owns German property through a German resident company, the dividends paid by the company are generally subject to withholding tax (Kapitalertragsteuer) at the rate of 25%, increased to 26.38% by the 5.5% solidarity surcharge; this rate may however be reduced by tax treaty.
VAT is a tax levied on consumer expenditure. The sale of real estate is generally exempt from VAT.
The supply of services related to real estate situated in Germany is however, generally subject to VAT and accounted for in Germany. The standard rate of VAT in Germany is currently 19%.