How is each type of corporate vehicle used to invest in real estate taxed?
15.825% corporation tax including a solidarity surcharge is payable on profits, and (generally) trade tax on taxable profit for trade tax purposes at a minimum rate of 7% (depending on the relevant municipality), which is defined as taxable profit for corporation tax purposes plus certain add back items and less certain deductions. The trade tax rates vary, since this tax is levied by the municipalities. A company, or corporation can have a tax presence in more than one municipality. The company or corporation can qualify for a trade tax‑exemption if it generates income only from leasing its own property. Business expenses, depreciation and amortisation are tax deductible. Deductions can also be claimed for interest, provided that the deductibility is not limited by the interest cap rule, introduced by the Business Tax Reform Act 2008. Under the interest cap rule, interest expenses are generally fully deductible as business expenses in an amount equal to the interest income of the business unit (Betrieb). If interest expenses in excess of interest income (that is net interest expenses) exceed €3,000,000, deductibility is limited to 30% of EBITDA (earnings before interest, taxes, depreciation and amortisation). Exemptions to this interest cap rule may apply.
In respect of trade tax, 25% of all interest on debt payments (as far as interest payments have already been deducted) and 6.25% of the expenditure on temporary usage rights (for example licences and concessions) must be added back into the taxable income to the extent it exceeds €100,000.
A GmbH must deduct withholding tax on dividends at the rate of 25% plus a solidarity surcharge (total tax rate 26.375%).
Withholding tax may be credited against the investors’ income or corporate income tax. As regards private investors, in certain circumstances a flat tax of 26.375% may apply which is treated as settled by the withholding tax deducted.
If the EU Parent-Subsidiary Directive applies, (ie if dividends are paid by a German GmbH or AG to another EU corporation, which has held 10% of the shares in the German GmbH or AG for an uninterrupted period of 12 months prior to the distribution of dividends), and the shareholder is sufficiently large and active, no withholding tax is payable as long as the shareholder provides an exemption certificate to the company. The shareholder must apply for this certificate from the German Federal Central Tax Office (Bundeszentralamt für Steuern). If the shareholder has not obtained an exemption certificate but the requirements of the Parent-Subsidiary Directive and the substance requirements are met, the tax will be refunded upon application.
If the EU Parent-Subsidiary Directive does not apply, but a double‑tax treaty does, withholding tax of between 10% and 15% is normally payable (although this is generally deductible against tax due on taxable German income).
Withholding taxes exceeding these rates will be refunded upon application, provided the shareholder meets the substance requirements. In addition, withholding taxes may be refunded eg if the shareholder held a stake of at least 10% of the share capital as of the beginning of the relevant fiscal year of the distributing entity.
German tax law provides a special tax regime for REITs when the following requirements are met:
The maximum direct shareholding by any one person or entity is limited to 10% of the shares. In addition, at least 15% of the shares must be held in free float and, at the date of the admission of the REIT, 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.
At least 75% of the assets of a REIT must consist of real estate (an existing residential building cannot be part of the assets) and 75% of the REIT's gross yield must result from leasing or selling immovable assets.
A REIT's income is exempt from corporate and trade tax as long as at least 90% of its profits are distributed to the shareholders. If less than 90% of the profits are distributed the tax authorities may impose penalty payments amounting to between 20% and 30% of the difference between 90% of the profits and the dividends actually distributed.
Distributions are fully taxable at shareholder level. The REIT must impose a withholding tax of 25% plus a solidarity surcharge (total tax rate 26.375%). Presently 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 was changed by the Business Tax Reform Act 2008. From that date private capital investment income became subject to a final withholding tax of 25% plus a solidarity surcharge (total tax rate 26.375%) if certain requirements are met.
The fund is subject to corporation tax at a 15% tax rate for certain domestic income. The taxable domestic income includes, in particular:
The fund is subject to German trade tax if it is engaged in trade or business.
German investors in an investment fund are subject to tax on the following income (so called ‘Investment Income’):
The Investment Income may be tax-exempt to a certain extent (so called partial exemption – Teilfreistellung). For real estate funds, the partial exemptions amount to 60% if the fund holds domestic real estate properties and 80% if the fund holds foreign real estate properties. A qualified real estate fund is an investment fund which invests more than 50% of its value in real estate or real estate companies.
At the level of German private investors, investment income is subject to a final tax burden of 25% (plus solidarity surcharge of 5.5%) in accordance with section 20 para 1 no. 3 of the German Income Tax Act.
Special investment funds are subject to the same principles set out above. Hence, the special investment fund is generally subject to German corporate income tax on certain domestic income. Other than the mutual investment fund, a German special investment fund may opt for a transparent taxation regime (Transparenzoption). When opting for the tax transparency status, certain income is directly allocated to investors.
The German Investment Tax Act offers various options to optimise the tax burden of an investment fund structure by considering certain investor-specific tax positions.
A KG is a tax-transparent entity. The taxation of income from letting real estate in Germany by a partnership depends, for corporation tax purposes, on the status of its partners and, for trade tax purposes, on whether or not the real estate is held through a permanent establishment.
Corporate partners are subject to German corporate income tax at the rate of 15.825% (including solidarity surcharge). Individuals who are partners are subject to German income tax at their individual tax rate.
If the partnership has a permanent establishment in Germany it is subject to German trade tax on income. The partnership may qualify for a trade tax‑exemption if it generates income only from leasing its own property. If there is no German permanent establishment, no trade tax will be payable.
There is no additional tax on profit repatriation from the German partnership to investors.
The sale of real estate by the partnership, as well as a sale of an interest in a partnership which is not engaged in a trade or business, is treated as the partial sale of the underlying assets by the partners. Thus, the taxation depends on the legal status of the individual partners. Corporate partners are subject to German corporate income tax at the rate of 15.825% (including solidarity surcharge). Individuals are subject to German income tax at their individual tax rate.
If the German partnership is engaged in a trade or business, the partnership itself is subject to German trade tax at a rate minimum 7% on capital gains arising from the sale of real estate (although certain deductions and exemptions may apply). The trade tax rate depends on the municipality. The same applies to any capital gains from the sale by a corporation of its interest in a partnership.
