Real estate investments of foreign corporations in Germany from a tax perspective
The “brick crisis” in southern Europe, in addition to the increasing appreciation of real estate in Germany, is causing foreign investors to invest in real estate here. The following points examine the majority of such investments: foreign corporations that do not have any domestic business sites and are headquartered as well as managed from abroad.
1. The acquisition of real estate
The purchase of real estate in Germany must comply with German law (lex rei sitae). Special regulations in this context are that sales contracts must be notarized and that purchasers must be recorded as owners in the land registry. Domestic and foreign corporations are permitted to purchase real estate in Germany.
Real Estate Taxes
The sale of real estate through corporations is subject to real estate taxes in Germany. Both purchaser and seller are required to pay real estate taxes. However, the obligation to pay is usually addressed to the purchaser in a notarized sales contract. The real estate tax is measured by the value of the consideration received (§ 8 Abs. 1 GrEStG). Anything the real estate buyer expends to purchase the property is deemed to be consideration. This is primarily the purchase price as well as the liabilities and burdens the buyer takes on (mortgage rights, property rights). The tax rate in Germany amounts to 3,5-6,5% of the assessment basis, depending on the state. Real estate tax should be deducted as a business expense.
Real estate tax also applies when at least 95% of the shares of a corporation possessing real estate are transferred. In this case, the assessment basis is not the purchase price of the company shares but rather the required value prescribed by valuation law.
The acquisition of real estate is essentially exempt from sales tax because it is already subject to real estate taxes (§ 4 Nr. 9 a UStG). The purchaser has the option to choose between the two and thereby can obtain a sales tax refund on expenditures from the tax office. However, a prerequisite is that the purchase is for a business, which produces sales tax itself. Accordingly, there is the possibility to be subject to sales tax when purchasing office and business property, which is not the case when purchasing solely residential property.
Corporations that are taxable in Germany must pay a 15% corporate tax on their income. An additional 5,5% of this tax amount is collected as a solidarity surcharge, so that profit is taxed at a total of 15,825%.
Profits from renting and leasing should be included in the taxable income.
With foreign corporations it is important to comply with existing double taxation agreements. These agreements can lead to paid taxes being refunded as agreed on in the respective double taxation agreement or taxes paid in Germany being credited for taxes due abroad. Usually income is taxed in the country where the real estate is located.
Acquisition and production costs like interest on borrowed capital, which originate domestically or abroad, are considered in the context of tax deductions for depreciation. Only costs associated with the building and not the land are deductible. For newly constructed buildings and buildings constructed after 1925 a deduction of two percent of the acquisition cost applies.
Tax write-offs for modernization work, on the other hand, can be deducted in a short period of time. Deductions for renovation and modernization costs can be evenly distributed over a period of two to five years. Small repairs can be deducted immediately in a year. Purchasers of real estate in need of renovations should be aware however, that if the cost is higher than 15% of the acquisition cost of the building, then the renovation cannot be deducted immediately but only consistently by two percent.
Domestic commercial operations in Germany are subject to trade tax with respect to their income. Starting point for calculating trade tax is the underlying profit base determined by corporate tax law (trade income). This amount is then multiplied with the tax base rate of currently 3,5% and with the collection rate in force in the respective area.
Foreign corporations that do not have any business sites in Germany are not subject to trade tax.
2. The sale of real estate
Foreign corporations are taxable for profits realized from the sale of real estate whether they have domestic business sites or not. This corporate tax amounts to 15,825% including the solidarity surcharge incurred. With appropriate planning, a tax-free acquisition of real estate is possible after owning the real estate for ten years.
Foreign corporations that do not have domestic business sites do not have to pay trade tax for the sale of real estate.