Are additional taxes incurred if any income generated from a real estate investment is transferred to the shareholders or partners in the relevant vehicle and can these be reduced or offset in any way?
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.
