Country - Germany
Corporate Vehicles
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A. DIRECT INVESTMENT
In Germany, real estate investment can take place in two ways: either through a permanent establishment or without a permanent establishment (Betriebsstätte).
1. Investment without a permanent establishment
Minimum capital
Not applicable.
Set-up costs
Not applicable.
Time required to become operative
Not applicable.
Costs per annum for corporate and accounting compliance
Costs include accounting fees for income tax/corporation tax and VAT purposes. Annual income tax/corporation tax returns and monthly/annual VAT returns are required. Annual costs amount to approximately EUR 5,500.
Corporate governance
Not applicable.
Regulatory control
Not applicable.
Taxation of current income of foreign corporations in Germany
26.375% corporation tax and solidarity surcharge (15.885% as of 1 January 2008) tax is levied on revenues that exceed income-related expenses. Real estate tax and amortisation are deductible. Limitations with respect to deduction of interest apply to corporate investors.
Taxation of current income of foreign individuals in Germany
Provided that the individuals hold their investment in a manner that constitutes a trade or business in Germany, the same interest deduction limitations as for corporate investors apply. Foreign individuals are subject to taxation based on individual income. Individual income tax rates are as follows: (i) for EU nationals from 15% to 42%; (ii) for non-EU nationals from 25% to 42%. As of 1 January 2007 an additional tax bracket of 45% applies to taxable income in excess of EUR 250,000 for singles and EUR 500,000 for married couples. This tax bracket applies only to taxable income other than from trade or business, professional services or agriculture and farming.
Taxation of distribution of current income to investors
No further taxation or withholding tax applies.
Taxation of capital gains
Sale of real estate assets:
Capital gain is calculated as sales proceeds minus transaction cost less the book value of the sold asset at the time of transfer of the economic ownership to the purchaser.
Non-resident corporations:
Sales closed prior to 1 January 2008. Corporation tax including solidarity surcharge: 26.375%. Trade tax effective rates are 10% to 20%, no trade tax becomes due under most German double taxation treaties.
Sales closed after 31 December 2007. Corporation tax including solidarity surcharge: 15.875%. Trade tax effective rates are 7% to 17.15%, no trade tax becomes due under most German double taxation treaties.
Non-resident individuals:
Capital gains are tax exempt, provided that the real property had been held for longer than 10 years prior to the sale. Capital gains realised through the sale of real estate which has not been held for longer than 10 years taxable at individual income tax rate (rates see above: Taxation of current income of foreign individuals in Germany). Trade tax at effective rates between 10% and 20%. Trade tax is a deductible expense for income tax purposes. Provided that sale closes after 31 December 2007 effective trade tax rate will reduce to between 7% and 17.15%. Trade tax is no longer a deductible item in the determination of taxable income for income and trade tax purposes. Under most German double taxation treaties no trade tax becomes due.
Sale of a participation in real estate company:
Not applicable.
2. Investment through a permanent establishment
Minimum capital
Not applicable.
Set-up costs
Registration fees for registration in the commercial register.
Time required to become operative
The permanent establishment can begin trading immediately.
Costs per annum for corporate and accounting compliance
Costs include accounting fees for income/ corporation tax and VAT purposes. Annual income/corporation tax returns and monthly/annual VAT returns are required, as well as the preparation of annual financial statements. Annual costs amount to approximately EUR 2,000.
Corporate governance
Not applicable.
Regulatory control
Not applicable.
Taxation of current income of foreign corporations in Germany
Financial years ending until and including 31 December 2007:
26.375% corporation and solidarity tax is payable on profits; and 13% to 20% trade tax on trade earnings (deductions and other adjustments apply). Trade tax and amortisation are deductible. For financial years ending after 31 December 2007, the effective corporation tax rate will be reduced to 15.875% (including 5.5% solidarity surcharge). Trade tax rate will be lowered to [effective] between 7% and 17.15%. Amortisation and in principle interest are deductible items in the calculation of taxable income. Trade tax is no longer a deductible item in the calculation of taxable income. Certain restrictions apply to deduction of interest. For trade tax purposes inter alia 25% of any interest expense is added back to taxable income.
Taxation of current income of foreign individuals in Germany
Non-resident individuals are subject to taxation based on individual income tax rates. Restrictions on the deductibility of interest expenses apply, trade tax at between 13% and 20% (reduced to between 7% and 17.15% as from 1 January 2008) is payable on trade earnings (deductions and certain other adjustments apply). Trade tax can be partially offset against income tax. Individual income tax rates are as follows: (i) for EU nationals from 15% to 42%; (ii) for non-EU nationals from 25% to 42%, plus a solidarity surcharge of 5.5% of the income tax due. As of 1 January 2007, an additional tax bracket of 45% applies to income other than from trade and business, professional services, agriculture and farming, provided that such income exceeds EUR 250,000 for singles and EUR 500,000 for married couples.
Taxation of distribution of current income to investors
No further taxation or deduction of tax.
Taxation of capital gains
Sale of a real estate asset:
Non-resident corporations:
Sales closed prior to 1 January 2008:
26.375% corporation tax (including 5.5% solidarity surcharge on tax due). Trade tax 13% to 20% on taxable income for trade tax purposes.
Sales closed after 31 December 2007:
15.875% corporation tax (including 5.5% solidarity surcharge on tax due).
Trade tax 7% to 17.15% on taxable income for trade tax purposes.
Non-resident individuals:
Provided that real estate is an asset of the German permanent establishment capital gain is subject to income tax and trade tax at regular rates (see preceding paragraphs).
Non-resident individuals:
No tax is payable if the real estate has been held for more than 10 years; if the real estate has been held for less than 10 years then income tax is payable at the individual income tax rate and trade tax at 13% to 20% on trade earnings (the same deductions apply). Trade tax rate reduces to between 7% and 17.15% for sales closing after 31 December 31 2007. Trade tax is not payable under most German double taxation treaties.
Sale of a participation in a real estate company:
Not applicable.
3. Real estate transfer tax
A real estate transfer tax of 3.5% (4.5% in Berlin) is levied on the price of real estate in Germany. All parties involved in the real estate transfer agreement are liable for this tax, although the seller will normally insist on a clause which provides for the buyer to pay it.
Real estate transfer tax is also payable where 95% or more of the shares in a company holding real estate in Germany are acquired by a single buyer. The same applies if in a partnership which owns real estate, 95% of the capital interests are transferred to new partners within any five-year period.
B. INDIRECT INVESTMENT THROUGH CORPORATE VEHICLES
Two types of corporate vehicle are used for real estate investment in Germany: Gesellschaft mit beschränkter Haftung (GmbH), and the Aktiengesellschaft (AG).
1. Gesellschaft mit beschränkter Haftung (GmbH)
Minimum capital
EUR 25,000.
Set-up costs
EUR 1,500.
Time required to become operative
For liability reasons, it is recommended that trading is commenced only upon registration in the commercial register. This can take between three and six weeks from the submission of the application.
Costs per annum for corporate and accounting compliance
EUR 12,000 plus the cost of internal auditors EUR 10,000/20,000. Auditors are only required when certain thresholds relating to the balance sheet total, turnover, and number of employees, are exceeded.
Corporate governance
Considerable flexibility on corporate governance can be agreed in the articles of association. Voting and profit rights can be freely allocated. Shareholders can appoint and remove directors. Shareholders may have approval rights on management decisions, but management is in charge of day-to-day business. The company can be managed by a sole director or a board of directors.
An external auditor is required only if certain thresholds, relating to the balance sheet total, turnover and number of employees, are exceeded.
Regulatory control
Not applicable.
Taxation of current income in Germany
26.375% corporation and solidarity tax is payable on profits and 13% to 20% trade tax on trade earnings. Business expenses, interest, trade tax and amortisation are deductible. For financial years ending after 1 January 2008 the effective corporation tax rate is lowered to 15.875% (including solidarity surcharge of 5.5% on the tax due). Limitations on interest deduction apply.
Taxation of distribution of current income to investors
Tax-resident shareholders
Withholding tax on dividends applies at a rate of 20%.
95% of dividends received by corporate shareholders are tax exempt, but this exemption does not apply to dividends paid on shares held as inventory by banks, financial service providers or finance companies.
50% of dividends received by individuals are tax exempt and, equally, 50% of related expenses are not deductible.
As of 1 January 2009 withholding tax on dividends will be increased to 25%. With respect to individual shareholders, who hold less than 10% in the Corporation's share capital, the withholding tax can be set off against the investor's income tax liability. Upon the investor's application, however, 60% of the dividend is subject to income tax at regular rates. In such a case withholding tax will be credited against the income tax due. For those individuals who hold more than 10% of the companies share capital, dividends received will be tax exempt as to 40% of the gross dividend. Withholding taxes on dividends will be credited against the income taxes due. 40% of expenses related to such dividends are non-deductible.
Non tax-resident shareholders
If the Parent-Subsidiary Directive applies, no withholding tax is payable.
If the Parent-Subsidiary Directive does not apply, but an OECD (Organisation for Economic Co-operation and Development) double tax treaty does apply, a withholding tax ranging from 5% to 15% is normally payable (this is generally deductible against tax due on taxable German income). Withholding taxes applied in excess of the rates under an applicable Double taxation treaty will be refunded upon the shareholder's application.
Taxation of capital gains
Sale of real estate assets:
26.375% corporation and solidarity tax is payable on profits. Business expenses and trade tax are deductible. 13% to 20% trade tax is payable on trade earnings (deductions and certain exemptions may apply). As of 1 January 2008 the effective corporation tax rate will be reduced to 15.875% (including 5.5% solidarity surcharge on the tax due). Trade tax rates will be reduced to between 7% and 17.15% respectively).
Sale of a participation in a GmbH:
If the seller is a resident corporation, only 5% of the capital gains are subject to taxation.
If the seller is a resident individual holding less than 1% of the share capital as an asset outside a trade or business for more than one year, capital gains are exempt from capital gains tax. If the seller holds the participation for less than a year (regardless of the percentage or size of participation), 50% of the capital gains are exempt from capital gains tax. If the seller holds at least 1% of the share capital for more than one year or holds the shares as an asset of a trade or business, the entire amount of capital gains is subject to capital gains tax at a rate of 20%, plus an additional solidarity surcharge, making a total of 21.1%.
If the shares are held in an asset of a trade or business trade tax at rates varying between 13% and 20% additionally become due on the gain.
As of 1 January 2009 any capital gain realised through the sale of shares in a GmbH held as an asset outside a trade or business will be subject to tax at a preferential rate of 25% regardless of how long the shares have been held for, provided however, that the shares have been acquired after 31 December 2008. For shares acquired prior to that date the previous tax regime applies. Capital gains resulting from sales of shareholdings in excess of 1% or from the sale of shares which are assets of a trade or business will be tax exempt to 40%. The remainder is subject to income tax at regular rates. Capital gains resulting from the sale of shares which were assets of a trade or business are subject to trade tax at rates between 7% and 17.15%.
If the seller is non-resident, capital gains are not subject to tax, provided that the shares were not an asset belonging to a German permanent establishment in Germany under the OECD (Organisation for Economic Co-operation and Development) model double tax treaty.
2. Aktiengesellschaft (AG)
Minimum capital
EUR 50,000.
Set-up costs
EUR 5,000.
Time required to become operative
For liability reasons it is not advisable to commence trading prior to registration of the AG in the commercial register. Depending on circumstances and workload in the local court with responsibility for the trade register, registration can take between one week and several weeks after the registration application has been filed.
Costs per annum for corporate and accounting compliance
EUR 20,000 plus the cost of external auditors (EUR 10,000/15,000).
Corporate governance
Corporate governance rules are quite elaborate. Changes are possible to a limited extent. It is possible to create different classes of shares with different rights. Voting rights and profit participation rights may be allocated differently for each class of share.
Joint stock companies are managed in the following way:
- a sole director or board of directors is appointed by the supervisory board;
- management is supervised by a supervisory board, appointed by the shareholders' meeting.
The need for a statutory audit depends on the same criteria as in the case of a GmbH. However, every listed AG is subject to statutory audit.
Regulatory control
Not applicable except for listed stock corporations.
Taxation of current income in Germany
As for a GmbH.
Taxation of distribution of current income to investors
As for a GmbH.
Taxation of capital gains
As for a GmbH.
C. INDIRECT INVESTMENT THROUGH PARTNERSHIPS
The only partnership under German law which offers partners limited liability is the Kommanditgesellschaft (KG).
Minimum capital
Not applicable.
Set-up costs
EUR 1,000.
Time required to become operative
In order to protect the limited partners against personal liability it is advisable not to commence trading prior to registration of the limited partners in the KG as such in the commercial register. Depending on the workload in the local court with responsibility for the commercial register, the registration may take up to several weeks after the application for registration has been filed.
Costs per annum for corporate and accounting compliance
EUR 10,000.
Corporate governance
There is considerable flexibility to agree corporate governance in the partnership agreement.
Voting and profit participation rights can be freely allocated.
The general partner (Komplementär) is, by law, the managing partner. Limited partners (Kommanditist) may have certain limited approval rights over management decisions. A statutory audit is required under certain circumstances.
Regulatory control
Not applicable.
Taxation of current income in Germany
Being a partnership, a KG is a tax-transparent entity. Consequently, where the partnership neither operates a trade or business in Germany nor is deemed to operate a trade or business in Germany and the partnership interest does not "belong" to the partner through a German permanent establishment, the same rules as apply to investment without a permanent establishment apply. Non-resident partners in the KG are entitled to treaty protection under any applicable double taxation treaty, provided that they themselves qualify as a "person".
Where the partnership operates a trade or business, or is deemed to operate a trade or business or the partnership interest "belongs" to the partners through a German permanent establishment the rules applicable to investment with a permanent establishment apply. With respect to treaty protection of the partners the previous paragraph applies.
Taxation of distribution of current income to investors
Distributions are not taxed. Income is simply distributed to partners and taxed at the level of the individual partner.
Taxation of capital gains
Sale of a participation in KG:
The rules applicable to investment without a permanent establishment and investment with a permanent establishment apply respectively.
Tax on real estate transfer
Sale of real estate assets:
Real estate transfer tax may apply.
D. INDIRECT INVESTMENT THROUGH COLLECTIVE INVESTMENT VEHICLES
1. German REIT
Legal form Publicly listed stock corporation. To qualify as a REIT the joint stock company must be listed on a stock exchange. The shares have to be admitted to trade on an organised market in an EU member state or another state which is a party to the Treaty on the European Economic Area.
Minimum capital
EUR 15,000,000.
Restrictions to shareholding
Maximum direct shareholding <10%
At least 15% (or on the date of admission, 25%) of the shares must be held in free float. A share is held in free float if the shareholder holds less than 3% of the voting rights in the REIT.
Set-up costs
EUR 5,000/EUR 1.5,000,000 – 2,000, 000.
Time required to become operative
General:
For liability reasons it is not advisable to commence trading prior to registration of the AG in the commercial register. Depending on circumstances and the workload of the local court with responsibility for the trade register, registration can take any time between one week and several weeks after the registration application has been filed.
Additional time is required for the public listing of the REIT on a recognised stock exchange.
Pre-REIT:
Since for many companies it will not be possible to comply with all the prerequisites of a REIT straight away (in particular to achieve a public listing), legislation allows the option of establishing a pre-REIT.
A pre-REIT is a stock corporation which is registered as such with the Central German Federal Tax Office (Bundeszentralamt für Steuern). One year after the registration the pre-REIT must prove to the Central German Federal Tax Office that the object of its enterprise as well as the requirements of the structure of assets and earnings comply with the law. This also applies in following years.
The pre-REIT must apply for a listing on a stock exchange within three years following its registration as pre-REIT.
If no such application is made, or if it is turned downed or if it fails to meet the conditions above its status as a pre-REIT is lost.
Costs per annum for corporate and accounting compliance
EUR 20,000 plus the cost of external auditors EUR 10,000/15,000.
Corporate governance
A REIT as a stock corporation is subject to the German Companies Act unless the Act for the creation of German REITs (Gesetz zur Schaffung deutscher Immobilien-Aktiengesellschaften mit börsennotierten Anteilen (REITG)) provides otherwise.
In general the corporate governance rules are the same as for a "normal" AG.
Please note that with a REIT it is not possible to create different classes of shares with different rights i.e. all shares are to be issued as the same class including applicable voting rights (shares with or without par value).
Regulatory control
REITs as listed stock corporations are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).
Other restrictions
At the end of the business year 75% of the assets must consist of immovable assets. Real estate mainly used for residential purposes and constructed before 1 January 2007 cannot be part of a REIT's assets.
75% of the REIT's gross yield must derive from letting, leasing and selling immovable assets.
Taxation of income of the REIT in Germany The REIT's income is exempt from corporate and trade tax as long as a minimum of 90% of the REIT's profits are distributed to the shareholders.
Taxation of distribution of current income to investors
Distributions are fully taxable at shareholder level (i.e. distributions are neither subject to tax preferences such as the "Half-income System" nor to the German participation exemption).
In principle the REIT must apply a withholding tax of 25% (plus 5.5% solidarity surcharge). At present this withholding tax will be credited against assessed income tax and/or refunded if applicable.
As of 1 January 2009 the taxation of private income from capital investment will be entirely changed by the Business Tax Reform Act 2008. As of that date income will in principle be subject to a final withholding tax of 25% (plus 5.5% solidarity surcharge). It is still to be settled whether the legislator will leave this rule unchanged with respect to distributions of the REIT.
Taxation of transfer of real estate
The transfer of real estate on to a REIT or pre-REIT is subject to tax privileges. Under certain conditions only half of the capital gain is taxed (Exit Tax).
The conditions are as follows:
The sale must be based on a valid agreement legally concluded between 1 January 2007 and 31 December 2009, and the real estate sold must on 1 January 2007 have been part of the seller’s domestic business assets for at least five years.
Exit Tax is also applicable where there is a tax related change of status into a REIT if this change of status results in the realisation of capital gains and is affected 31 December 2009. In such a case, prior to the real estate which was acquired or built before 1 January 2005 also benefits from privileges.
Exit Tax taxation privilege is, however, limited by an extensive list of exceptions.
2. Real Estate Investment Fund
The only collective investment vehicle available for investments in real estate is the real estate fund (Immobilien Sondervermögen).
Management company
A real estate fund can only be set up and managed by a German asset management company (Kapitalanlagegesellschaft, KAG).
Minimum capital
KAG: EUR 2,500,000.
Fund: not applicable.
Set-up costs
KAG: EUR 30,000.
Fund: EUR 25,000.
Time required to become operative
KAG: six months.
Fund: five months.
Costs per annum for corporate and accounting compliance
KAG: EUR 30,000/40,000.
Fund: 0.3-0.5% of the fund's asset value.
Corporate governance
All decisions relating to the investment policy of the fund must be taken by the KAG. Some day-to-day business matters can be delegated to a third party asset manager. Investment decisions cannot be subject to approval by unit holders. Unit holders can revoke and replace the KAG under certain restricted circumstances.
German funds (Sondervermögen) are generally open ended.
Special rules apply to funds reserved to institutional investors (Spezial Sondervermögen or Spezialfonds). There must be no more than 30 investors, no individual investors, and no prospectus is required.
Regulatory control
The KAG and the fund are regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Monthly reporting is required.
Shareholders in the KAG and the managing directors are subject to certain professional and suitability requirements.
Taxation of current income in Germany
In principle, the fund is a taxable entity but a tax exempt entity.
Taxation of distribution of current income to investors
German-resident investors, both companies and individuals, are subject to tax on distributions and on deemed distributions as if they had invested directly in the fund's assets. Distributions and deemed distributions are treated as dividends. Where these are financed through dividends received by the funds, the preferential tax treatment of dividends applies. In the case of Spezialfonds, income from real estate is allocated to unit holders in the fund proportionately to the units held by them. This also applies under applicable double taxation treaties. Depending on whether distributions are financed by dividend interest or by rental income, withholding tax of between 20% and 30% applies. This, however, is subject to reductions under applicable double taxation treaties.
Taxation of capital gains
Sale of assets by the fund
As mentioned above, the fund itself is tax exempt. At the level of the unit holders, capital gains are tax exempt if the real estate has been held by the fund for more than 10 years, and the unit holder is an individual holding his units outside a trade or business.
If the unit holder is a corporate entity, capital gains are subject to tax.
In the case of Spezialfonds, special rules apply: capital gains from the sale of real estate are allocated to unit holders in the fund in proportion to the units held. Unit holders are subject to tax as if the real estate were held by the unit holders directly. This also applies under double taxation treaties. For individuals holding their units outside a trade or business, tax is payable at 15 to 45% depending on their total taxable income with an additional solidarity surcharge of 5.5% on the tax due.
Trade or business
Additionally trade tax at payable of approximately 15% to 20% (7% to 17.15% as of 1 January 2008). This can be partially offset against income tax. Corporate entities pay corporation tax at 25% (15% as of 1 January 2007), plus an additional solidarity surcharge of 5.5% of the tax due, plus trade tax of between 15% and 20%. Trade tax rates will be reduced to between 7% and 17.15% as of 1 January 2008.
Sale of units by unit holders
Individuals holding units outside a trade or business are tax exempt, provided that the units have been held for more than one year; otherwise the sale is taxable at the above rates. Any capital gains realised through the sale of units held outside a trade or business and acquired after 31 December 2008 will be subject to a withholding tax at a rate of 26.375% (including solidarity surcharge of 5.5% on the tax due) this also discharges the income tax liability of the unit holder. Capital gains realised through the sale of units held as an asset of a trade or business or units held by corporate investors are, when the same conditions apply subject to the withholding tax mentioned above, however, the withholding tax is credited against the actual income or corporation tax. Income taxes vary (depending on the overall taxable income) between 15% and 45%. The Corporation tax rate is 15%. An additional solidarity surcharge of 5.5% becomes due; on these taxes as well as trade tax at a rate of 7% to 20% (until 31 December 2007) or 7% to 17.5% (from 1 January 2008).
E. RULES ON LEVERAGE
1. Thin capitalisation rules
(Applicable to financial years commencing prior to 23 May 2007 and ending before or after 31 December 2007.)
(a) Corporations
Interest deductions in excess of EUR 250,000 are subject to limitation.
No deduction at all is permitted in cases where interest is defined as a fraction of the outstanding principal amount and performance criteria of borrowers apply (e.g. a certain level of profitability must be achieved or the corporation must have the ability to pay all other debt as it becomes due). Interest on the portion of a loan exceeding a debt to equity ratio of 1.5:1 is not deductible.
Specific rules apply to loans granted by shareholders who hold more than 25% of the borrower's share capital (major shareholders), or to loans granted by related entities, or third parties entitled to certain forms of recourse against the major shareholders or related parties.
(b) Partnerships
The same rules apply as above if a corporation holds a partnership interest in excess of 25% of the partnership's capital, and the loan is granted by a major shareholder or related party. The same rules on thin capitalisation as described above apply to third party loans.
(c) Collective investment vehicles
Thin capitalisation rules do not apply to collective investment vehicles, provided they are not organised as corporations. However, interest deductions may be limited under the substance over form rule, if the interest charges are regarded as excessive.
2. Interest Cap Rule
(Applicable to financial years commencing after 23 May 2007 and ending after 31 December 2007)
In principle, interest expense deduction to the extent it exceeds interest income (net interest expense) is limited to 30% of EBITDA (the "interest cap"). For corporate investors, which do not belong to a group of companies, this limitation does not apply, provided the investor provides evidence that interest, expense on loans from a shareholder holding more than 25% of the investor's share capital or entities related to such shareholders exceeds 10% of its net interest expense (harmful shareholder loans). Please note that loans from third parties may qualify as harmful shareholder loans.
Where investors belong, to a group of companies, the interest cap does not apply, provided that the investors' equity to balance sheet total (the equity ratio) as of the end of the preceding financial year equals the equity ratio as per the consolidated annual accounts of the group at the end of the same financial year and provided further that none of the companies belonging to the same group of companies as the investor is a party to a harmful shareholder loan from a lender which does not belong to the same group of companies as the investor and the borrower. Please note that the burden of proof for these facts is on the investor.
3. Withholding tax on interest
No withholding tax is paid on interest on loans taken out by taxpayers which are not banks or similar institutions. Banks must withhold tax on interest at the rate of 30% if the interest is payable to a lender other than a bank. The same rule applies if banks serve as paying agents. However, under most German double taxation treaties no withholding tax is payable on interest.
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