Investors, whether individuals, organizations or companies, wishing to invest in German real estate have a number of options, including a direct acquisition of the real estate or an indirect investment through the purchase of shares in the corporate vehicle or interest in the partnership owning the real estate.
Foreign investors can acquire real estate directly from abroad either with or without a local permanent establishment. There are also collective investment vehicles such as real estate investment trusts (REITs) or (open-ended) real estate funds (Immobilien-Sondervermögen). Special tax regimes apply to these investment vehicles.
Last modified 3 Apr 2023
A real estate transfer tax of 3.5 percent to 6.5 percent, depending on the German federal state in which the property is located, is generally payable on real estate transactions in Germany.
Real estate transfer tax applies to the direct purchase of a real estate asset, or to the grant or transfer of transferable building rights (Erbbaurechte). All parties involved in the real estate transfer agreement are generally liable for this tax, although the seller will normally insist on a clause which makes the buyer responsible for paying it.
The transfer of an interest in a partnership holding real estate triggers real estate transfer tax if 90% or more of the partnership interests are transferred within ten years. The partnership is liable for paying the real estate transfer tax. Irrespective of this ten-year period, real estate transfer tax becomes due if at least 90% of the partnership interests are directly or indirectly held by one entity or individual for the first time.
There are strategies available to avoid real estate transfer tax eg if the seller remains as a partner in the partnership, holding a stake of more than 10% for more than 10 years and provided further that the purchaser directly or indirectly does not acquire more than 89.9% of the interest in the partnership.
The acquisition of real estate via a corporation triggers real estate transfer tax if at least 90% of the shares are held by one entity, individual, or group of related entities or individuals for the first time. The entity, individual or group holding these shares is liable for the real estate transfer tax. Again, indirect transfers or concentrations of shares have to be taken into account in principle.
As of January 2010 a new rule (§ 6a Real Estate Transfer Tax Act, RETTA) was introduced into the law which allows in certain circumstances an exemption from real estate transfer tax where there is a restructuring within a group of companies.
Potentially, there are strategies available to avoid real estate transfer tax, eg if a company is acquired by two independent buyers.
An amendment of the German RETT rules in December 2022 means that timely RETT notification is of high importance. Generally, a RETT notification must be filed by the parties with the competent tax authority within two weeks (or one month, if applicable) after signing. A second RETT notification must be filed within two weeks after closing. If the notifications are not filed in a timely matter or not filed at all, a double-RETT burden may arise.
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In general, the acquisition of real estate is exempt from VAT. However, if both parties to the transaction are businesses, the seller can opt out of the VAT exemption. In this case VAT will apply at the rate of 19 percent. Opting out of the VAT exemption only makes sense where the seller has used or has intended to use the property for business activities that are subject to VAT. The VAT due on a real estate sale is subject to the reverse charge rule, ie the purchase price is a net price and the buyer will pay the amount due as VAT to the tax authority.
If the buyer is able to claim back the input VAT in full, no net VAT is ultimately payable on the transaction.
VAT paid on real estate transactions can be reviewed for a period of ten years. If the VAT status of a purchased building changes during this period (for example, if the building is no longer used for business activities subject to VAT) an adjustment will be made to the VAT initially reclaimed on the acquisition or construction of the building. The amount due is calculated pro rata over time.
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There are fees for the necessary changes to the land register (registration of a priority notice of conveyance, a change of ownership and potentially land charges). The person who applies for the changes to be made is responsible for paying these costs, so both the seller and the buyer are usually responsible jointly.
Most purchase agreements provide for the buyer to bear the costs. The fees are payable to the local court where the land register is kept.
Further, notary fees also need to be paid. The notary services are required by law as otherwise, the deal will not be legally accepted/binding.
Last modified 3 Apr 2023
Real estate tax (Grundsteuer) is currently charged by municipalities on the rateable value (Einheitswert) on an annual basis, as assessed by the fiscal authorities, who take into consideration factors such as the type of building, its age and use. The rateable value is usually below the market value. Tax is payable annually by the beneficial owner.
Each municipality can determine its own multiplier for the purposes of real estate tax. The average tax rate in West German states is 1.3% of the rateable value and in East German states (including the eastern parts of the city of Berlin) it is 1%.
Real estate tax has been recently reformed and will come into force as of 1 January 2025. While most of the states follow the federal model of real estate reform, Bavaria, Baden-Wurttemberg, Hamburg, Hesse and Niedersachsen have drafted their own real estate tax laws which lead to different regulations in these states.
Each owner of real estate in Germany had to file a real estate assessment in order to inform the tax authorities of the current buildings on their properties by 31 January 2023. German land owner will receive new assessment notices The amended real estate tax rules may lead to a higher tax burden on some real estate owners while decreasing it for others.
Further, municipalities will be able to set a higher assessment rate for plots of land that are ready for building but undeveloped, if no development takes place on them. This so-called real estate tax C thus makes speculation more expensive and creates financial incentives to actually create housing on land that is ready for construction.
Going forward, an assessment date for real estate tax purposes will be every seven years for which the owners of real estate have to declare their current information of their property to the tax authorities.
With the new regulations it is also mandatory to file real estate returns with the tax authorities if the actual status of the property changes within a year. A change of the actual status can be the completion of a building on a property, the demolition of a building on a property, a renovation or extension of a building and much more. The return has to be filed within one month after the end of the calendar year in which the change of the actual status of the property has taken place. Depending on the state the obligation and deadline may vary.
Real estate tax for business properties is deductible as an expense for corporate income tax and trade tax purposes.
Last modified 3 Apr 2023
Charges such as sewerage charges and waste disposal fees apply on an annual basis. Property owners may be obliged to pay for the development of an adjacent street. All these charges are payable to the local authority.
Last modified 3 Apr 2023
The income from ownership of real estate includes income from trade or business (Einkünfte aus Gewerbebetrieb), leasing income (Einkünfte aus Vermietung und Verpachtung) or other income (sonstige Einkünfte).
The categorization of a foreign investor's income depends on his activities in Germany.
The income of an investor is generally categorized as leasing income or other income (ie capital gains from the sale of the property).
In the scenarios below, however, the income of an investor will qualify as income from trade or business:
The income of a foreign corporate investor is generally categorized as income from trade or business.
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The income tax regime applicable depends on the legal status of the investor, on whether he operates, or is deemed to operate, a trade or business and on whether he has a permanent establishment in Germany.
Income from long-term lettings is, in principle, exempt from VAT, but an investor may opt to waive the VAT exemption in some circumstances. This is likely to be the case, for example, if input VAT has been paid on the cost of acquisition, or maintenance and repair costs, and the investor would otherwise be unable to recover it. However, one can only opt for VAT if the lessee is a taxable person for VAT purposes, leases the real estate for its business and does not itself carry out activities which might exclude a VAT deduction.
If an investor invests directly in German real estate, the applicable tax regime depends on whether the investor operates, or is deemed to operate, a trade or business. Only if the investor is deemed to operate a trade or business or actually operates a trade or business can he have a permanent establishment in Germany.
In the scenarios below the investor operates, or is deemed to operate, a trade or business:
If the investor is a corporate entity with a permanent establishment in Germany, profits generated by the permanent establishment, including income from letting real estate located in Germany, are subject to corporate income tax at the rate of 15% plus 5.5% solidarity surcharge thereon, resulting in an effective tax rate of 15.825%. Expenses incurred from letting real estate are deductible and reduce the taxable income. This includes administration costs, maintenance costs, real estate tax and amortization. Amortization only applies to buildings, including the cost of acquisition and related expenses (such as notary's fees, legal fees, experts' fees etc), but not to the land itself. The annual amortization rate for buildings varies between 2% and 3% of the acquisition or construction costs. In certain cases higher amortization rates apply.
Deductions can be claimed for interest subject to the 'interest cap rule'. Under the interest cap rule all interest expenses are, in general, 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 (net interest expenses) exceed €3,000,000, the deductibility of interest paid on debt will be limited to 30% of EBITDA (earnings before interest, taxes, depreciation and amortization). Exemptions from this interest cap rule may apply.
Trade tax rates depend on the municipality where the permanent establishment is located and generally range between 7% and 19.25%. Trade tax is not deductible against taxable income. However, in certain circumstances there is – upon application - a trade tax-exemption available for investors carrying on asset management only, ie their activities are limited to letting and management of real estate. Allowable corporate income tax deductions generally apply for trade tax purposes.
In relation to trade tax, to the extent – among other things – that 100 percent of all interest on debt payments (as far as interest payments have previously been deducted from taxable income) and 25 percent of expenditure on temporary usage rights (for example licences and concessions) exceed a threshold of €200,000, 25 percent of such amount must be added back into taxable income.
If an individual investor operates, or is deemed to operate, a trade or business he can have a permanent establishment in Germany. If the investor generates income through a permanent establishment (as defined by the applicable double tax treaty) in Germany, including income from letting real estate located in Germany, this is subject to income tax at the individual tax rate of the investor.
The income tax rate for individuals ranges from 14% to 42%. An additional tax bracket of 45% applies to taxable income in excess of around EUR 277,000 for individuals and around EUR 555,000 for married couples subject to joint taxation if the income qualifies as leasing income. An additional solidarity surcharge of 5.5% applies to taxable income of EUR 65,516 or more per year for individuals and EUR 131,032 for married couples. For allowable deductions and trade tax, see above on corporate investors. Income tax relief is available to compensate for the additional trade tax exposure. Repatriation from the permanent establishment to a foreign investor is not subject to additional income tax.
Individual investors may become subject to German trade tax which can – in some circumstances – be credited against personal income tax liability. Repatriation from the permanent establishment to a foreign investor is not subject to additional trade tax.
Direct investment without a permanent establishment
If the investor is a corporate entity generating income from letting real estate in Germany, this income is subject to corporate income tax at the rate of 15 percent (plus 5.5 percent solidarity surcharge thereon). Therefore, the rate of corporate income tax is effectively 15.825 percent of the taxable income.
German resident corporate investors are subject to trade tax but may (upon application) qualify for a special tax exemption if they are exclusively engaged in long term letting and management of real estate. In the absence of a permanent establishment in Germany no trade tax is payable by foreign corporate investors.
If the investor is an individual generating income through letting real estate in Germany, this income is subject to German income tax at the individual tax rate. The income tax rate for German investors is determined by their worldwide income. No trade tax is payable.
All profits generated worldwide by a German corporate entity are subject to 15 percent corporate income tax (plus 5.5 percent solidarity surcharge thereon), resulting in an effective corporation tax rate of 15.825 percent, and to trade tax of generally between 7 percent and 19.25 percent. For potential deductions and trade tax exemptions see above.
Last modified 3 Apr 2023
Dividends distributed to shareholders by a German corporate investment vehicle are subject to a 25% withholding tax plus solidarity surcharge of 5.5%, leading to a total tax rate of 26.375%.
Under the EU Parent-Subsidiary Directive, no withholding tax is payable on dividends paid by a German company to another EU corporation, where the latter has held 10 percent of the shares in the former for an uninterrupted period of 12 months preceding the distribution of dividends. However, under the German Income Tax Act, corporations distributing dividends are obliged to retain withholding tax of 25 percent plus solidarity surcharge) even if the conditions of the EU Parent-Subsidiary Directive are met. This obligation does not apply if the shareholder provides an exemption certificate to the distributing company. If withholding tax is retained, the shareholder can make a claim for a refund.
In the case of non-EU shareholders, under nearly all German double taxation treaties, dividends distributed by a German corporate vehicle to non-resident shareholders are taxable in both countries (ie in the country in which the shareholder is resident and in Germany). The right of the German tax authorities to levy tax in these cases is limited (mostly to a maximum of 15 percent).
Any directive or treaty benefits are subject to anti-avoidance provisions. A foreign company has no entitlement to a tax relief:
If a resident corporate shareholder holds the shares as assets, 95% of the dividends received are exempt from corporation tax provided that a 10% stake in the distributing corporation is held as of the beginning of the relevant fiscal year. Special rules apply as regards acquisitions during the fiscal year as well as to stock lending transactions. The withholding tax deducted by the German corporate vehicle will be offset against the assessed tax payable by the resident shareholder or reimbursed, if applicable.
However, the current version of these anti-avoidance provisions was reviewed by the European Court of Justice (see case C‑440/17) anddeclared to be not compatible with the EU-Parent-Subsidiary Directive and to infringe the EU freedom of establishment like the former version (see case C‑507/16 and C‑613/16). It is to be expected how the German legislator will react this time.
For:
A participation exemption is only available if the shares are held as fixed assets.
A participation exemption for trade tax purposes requires among other things a minimum participation of 15 percent if the shareholder is resident in Germany for corporation tax purposes.
Dividends distributed by a corporate investment vehicle to a German resident individual are taxable at a rate of 25 percent plus a 5.5 percent solidarity surcharge thereon (ie 26.375 percent).
A shareholder with a lower individual income tax rate than 25 percent can opt for tax to be assessed at this rate in conjunction with the rest of his income. If the shares are business assets of the individual the dividends are 40 percent tax exempt and only 60 percent of the related expenses are tax deductible. The same applies if the shares are held as private assets and the shareholder either holds 25 percent or more of the shares, or at least 1 percent and is an employee of the corporation.
The taxation of income derived from letting real estate in Germany through a partnership depends on the partnership and whether it operates, or is deemed to operate, a trade or business. If the partnership operates, or is deemed to operate, a trade or business, it may perform its activities with or without a permanent establishment in Germany.
There is no additional tax on profit repatriations from the German partnership to foreign investors.
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If the investor is a corporation with a permanent establishment in Germany, through which it sells real estate located in Germany, any capital gains are subject to corporate income tax at the rate of 15% plus a 5.5% solidarity surcharge thereon, leading to an effective tax rate of 15.825%. Income is also subject to trade tax at a rate of generally between 7% and 19.25%, unless the corporation qualifies for a trade tax exemption. If the corporate investor is exclusively engaged in long term letting and management of real estate, a special trade tax exemption may apply upon application.
If the investor is an individual with a permanent establishment in Germany, through which he sells real estate located in Germany, any capital gains are subject to income and trade tax unless the investor qualifies for a trade tax exemption. If the individual is exclusively engaged in letting and managing real estate, a special trade tax exemption may apply upon application.
If the investor is a non-resident corporation selling real estate located in Germany, any capital gains are subject to corporate income tax at the rate of 15% (plus a 5.5% solidarity surcharge thereon), leading to an effective tax rate of 15.825%.
If the investor is an individual selling real estate located in Germany and the real estate is held as a private asset, capital gains are only subject to income tax in Germany if the real estate was held for less than ten years or if the sale qualifies as a trade or business activity.
An additional tax bracket of 45% applies to taxable income in excess of around EUR 277,000 for individuals and around EUR 555,000 for married couples who are subject to joint taxation if the income qualifies as leasing income. If the real estate was held for ten or more years and the property concerned was not an asset belonging to a trade or business, the income deriving from the sale is not taxable in Germany.
Where a private individual disposes of shares in a German company that are not a business asset, capital gains are subject to a tax rate of 25% plus a solidarity surcharge of 5.5% thereon (ie in total 26.375%). Where the shareholder held a direct or indirect stake of 1% or more in the company during the preceding five years, capital gains on the disposal are subject to the taxpayer's individual tax rate, however 40% of such capital gain is tax exempt.
If the shares disposed of are in a company that is an asset of a German permanent establishment, or of the taxpayer's trade or business, any capital gains are subject to income tax and trade tax regardless of the holding period or the size of the stake in the company. However, 40 percent of the capital gains are tax exempt at the level of an individual.
If a corporation disposes of shares in a German company, effectively only 5 percent of capital gains are subject to corporation tax and trade tax in Germany.
However, for non-resident corporations and individuals this tax regime may be affected by German double taxation treaties. In most German double taxation treaties capital gains are subject to tax in the country in which the selling shareholder resides and are tax exempt in Germany. However, according to a number of double taxation treaties, Germany's right to levy taxes applies where 50 percent or more of the German company's value consists of German real estate. In this case capital gains on the disposal of shares can be taxed in Germany, however in most of such cases the taxpayer is entitled to a tax credit in his country of residence.
The taxation of capital gains from the disposal of a partnership interest in a German partnership depends on whether its partners are corporations or individuals and whether the partnership operates, or is deemed to operate, a trade or business. If the partnership operates, or is deemed to operate, a trade or business, the partnership can perform its activities with or without a permanent establishment in Germany.
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There will be fees for the notary and possibly other legal advisors, as well as for the registration of the necessary changes to the land register, payable to the local court where the land register is held. Real estate transfer tax at 3.5 percent to 6.5 percent of the purchase price will also be payable.
Last modified 3 Apr 2023
Is VAT payable on the purchase of real estate and if so, can it be recovered?
In general, the acquisition of real estate is exempt from VAT. However, if both parties to the transaction are businesses, the seller can opt out of the VAT exemption. In this case VAT will apply at the rate of 19 percent. Opting out of the VAT exemption only makes sense where the seller has used or has intended to use the property for business activities that are subject to VAT. The VAT due on a real estate sale is subject to the reverse charge rule, ie the purchase price is a net price and the buyer will pay the amount due as VAT to the tax authority.
If the buyer is able to claim back the input VAT in full, no net VAT is ultimately payable on the transaction.
VAT paid on real estate transactions can be reviewed for a period of ten years. If the VAT status of a purchased building changes during this period (for example, if the building is no longer used for business activities subject to VAT) an adjustment will be made to the VAT initially reclaimed on the acquisition or construction of the building. The amount due is calculated pro rata over time.
Last modified 3 Apr 2023