The Real Estate Investment Structure Taxation Review: Germany
i Investment vehicles in real estate
Investments into German real estate can be made either directly or indirectly. As regards indirect investments, various investment vehicles may be used. The most common German vehicles are:
- German limited partnerships (GmbH & Co KGs);
- German limited companies (GmbHs); and
- regulated German investment funds.
Real estate investment trusts (REITs) do exist but are not very common in Germany. Instead of a German vehicle, foreign investors frequently use foreign limited companies (e.g., Luxembourg Sàrls), the rental income of which is usually not subject to German trade tax.
ii Property taxes
Real estate investments in Germany may be subject to various taxes.
Corporate income tax and trade tax
Income from real estate (in particular, rental income and capital gains) is subject to income tax (at a rate of up to 45 per cent, where applicable to individuals) or to corporate income tax (at a rate of 15 per cent, where applicable to corporations); in both cases, the solidarity surcharge is imposed (5.5 per cent on the income tax liability). In addition, trade tax at a rate set by the relevant municipality (the mean average in 2020 was 15.23 per cent)2 becomes due if the relevant real estate income is attributable to the German permanent establishment (PE) of a (domestic or foreign) business enterprise, unless the extended trade tax reduction applies. Trade tax is not deductible for corporate income tax purposes but may be credited (up to a certain limit) against individual income tax.
Value added tax
Although the selling as well as the letting of real estate is, as a matter of principle, exempt from value added tax (VAT), the VAT exemption may be waived, subject to certain requirements (and is typically waived if the requirements are fulfilled), to facilitate the deduction of input VAT. As a general rule, the VAT rate applicable to the selling and letting of real estate is 19 per cent. Under certain circumstances, the sale of real estate may qualify as a transfer of a going concern, in which case it is outside the scope of VAT.
Real estate transfer tax
Whereas the direct acquisition of real estate is generally subject to real estate transfer tax (RETT), the acquisition or transfer of shares or interests in a real estate holding corporation or partnership triggers RETT, in particular if (1) 90 per cent (or more) of the shares or partnership interests are, within a time period of 10 years, directly or indirectly transferred to new shareholders or partners; or (2) a transaction results in 90 per cent (or more) of the shares or partnership interests being (directly or indirectly) held by the same acquirer (or a group formed by the acquirer and affiliated entities). The law provides for certain (rather narrow) exemptions, in particular for certain transactions between related parties and for publicly traded corporations.
The RETT rates are set by the state in which the relevant piece of real estate is located and vary between 3.5 per cent (in the states of Bavaria and Saxony) and 6.5 per cent (in the states of Brandenburg, North Rhine-Westphalia, Saarland, Schleswig-Holstein, and Thuringia).
Regulated investment funds
The acquisition or transfer of shares in a real estate-holding German-regulated investment fund is typically not subject to RETT. The reason for this is that the real estate assets are, from a legal perspective, typically held not by the fund investors but rather in trust by the investment management company (i.e., the transfer or acquisition of 90 per cent or more of the shares in the investment management company triggers RETT instead).
The German legislator has, with effect from 1 July 2021, adopted a reform of the RETT Act, which led to the above-mentioned 90 per cent threshold (previously 95 per cent) and the above-mentioned 10-year period (previously five years). Further, the above-mentioned provision pursuant to which not only the transfer of 90 per cent of the interests in a real estate holding partnership but also the transfer of 90 per cent of the shares in a real estate holding corporation within a 10-year period to several acquirers triggers RETT is new. This new provision has been designed to tackle 'split deals' where two acquirers together acquire 100 per cent of the shares in a real estate holding corporation without one of them reaching the threshold of 90 per cent (previously 95 per cent). Such transactions had been described as 'abusive' by politicians from almost all political camps.
Land tax has to be paid by the owners of German real estate (and by holders of hereditary building rights). Liability is based on the assessed value of the relevant piece of real estate, the applicable measure factor (which depends on the type of real estate, e.g., farmland, residential properties or business properties) and a multiplier that is set by the relevant municipality.
On 10 April 2018, the Federal Constitutional Court ruled that the provisions dealing with the valuation of real estate for land tax purposes are unconstitutional. As a consequence, the legislator has adopted a reform that will come into force as of 1 January 2025 and that provides for a valuation of real property based on fair market value, which is then multiplied by a uniform factor (known as the basic federal rate) and a multiplier determined by the municipalities. Further, the federal states will be entitled to, and several federal states have announced to, opt out of the federal system and to adopt their own land tax systems instead.
Inheritance and donation tax
As a matter of principle, the transfer and acquisition of assets mortis causa or by way of donation is subject to German inheritance or donation tax if the transferor or the acquirer is resident in Germany or if the asset subject to the transfer and acquisition qualifies as a domestic asset. The latter is the case with respect to real estate located in Germany but not necessarily for shares in an entity that holds German real estate.
Asset deals versus share deals
i Legal framework
Real estate may be subject to various forms of transactions, in particular, asset deals and share deals. Whereas asset purchase agreements with respect to real estate always require notarisation, share purchase agreements require notarisation only if they relate to corporations in the legal form of a GmbH; purchase agreements with respect to partnership interests or shares in a stock corporation require no specific form. To effect the transfer of title to real estate assets, the acquirer needs to be registered as the new owner in the real estate register administered by the local courts. The transfer of shares in a GmbH and the transfer of interests in a GmbH & Co KG have to be registered with the commercial register (however, registration with the commercial register is not a condition precedent to the transfer of title unless otherwise stipulated by the parties).
ii Corporate forms and corporate tax framework
As mentioned above (see Section I.i), typical unregulated German vehicles for investment in real estate are limited partnerships (typically GmbH & Co KGs) and GmbHs.
GmbH & Co KG
While GmbH & Co KGs are generally transparent for corporate income tax purposes, three types of GmbH & Co KGs must be differentiated in terms of tax status.
If a partnership engages in a trade or business that goes beyond the mere holding and letting of real estate, it qualifies as a trade partnership. The rental income of a trade partnership is subject to trade tax at the level of that partnership (i.e., there is no transparency for trade tax purposes). The extended trade tax reduction (see Section II.iii, 'Rental phase: Corporate income and trade tax') is not available for trade partnerships.
Deemed trade partnerships
If a partnership does not engage in a trade or business that goes beyond the mere holding and letting of real estate, it does, as a matter of principle, not qualify as a trade partnership. However, an exception applies if all the general partners of that partnership are corporations and if none of the limited partners is entitled to manage the partnership. As in the case of a 'normal' trade partnership, the rental income of a deemed trade partnership is subject to trade tax at the level of that partnership. However, unlike a normal trade partnership, a deemed trade partnership may apply for the extended trade tax reduction if it fulfils the relevant requirements in its operations; to be eligible for the extended trade tax reduction, the partnership must in particular not rent out any assets other than real estate (see Section II.iii, 'Rental phase: Corporate income and trade tax').
Mere asset holding partnerships
A partnership that neither engages in a trade or business beyond the mere holding and letting of real estate nor qualifies as a deemed trade partnership is transparent not only for corporate income tax, but also for trade tax purposes.
As a matter of principle, GmbHs pay corporate income tax and trade tax on their income. However, a GmbH may apply for the extended trade tax reduction if it fulfils the relevant requirements in its operations (as a general rule, no business activity other than the letting of real estate; see Section II.iii, 'Rental phase: Corporate income and trade tax').
iii Direct investment in real estate
Over the life cycle of a direct investment into German real estate, the following tax aspects have to be taken into account.
Subject to a limited set of exceptions (e.g., for certain intra-group transactions), the execution of a sale-and-purchase agreement with respect to German real estate triggers RETT. The applicable RETT rate depends on the state in which the relevant piece of real estate is located; as mentioned above, the RETT rates vary between 3.5 per cent (in the states of Bavaria and Saxony) and 6.5 per cent (in the states of Brandenburg, North Rhine-Westphalia, Saarland, Schleswig-Holstein and Thuringia). As a general rule, the RETT rate is applied on the purchase price as agreed between the parties of the sale-and-purchase agreement. Exceptions apply if the purchase price is merely nominal (e.g., €1) or if, in the context of the purchase, a construction agreement is executed between the purchaser and a person related to the seller or otherwise belonging to the seller's sphere.3 In the first case, the RETT rate is applied on the real estate value (as determined pursuant to specific rules) rather than on the purchase price; and in the second case, the RETT base is increased by the construction cost. As regards the tax authorities, both parties of the sale-and-purchase agreement are liable for RETT, while under civil law the purchaser is solely liable unless otherwise agreed between the parties. RETT forms, as a matter of principle, part of the acquisition costs and must, therefore, be capitalised by the acquirer (and may not be immediately deducted).
As a general rule, the sale of German real estate is VAT-exempt. However, to avoid the correction of input VAT, the seller will often want to waive the exemption, in which case VAT at a rate of 19 per cent is owed by the purchaser under the reverse-charge mechanism (and may simultaneously be offset as input VAT if and to the extent that the purchaser plans to use the piece of real estate for activities that are not VAT-exempt). Further, if the sold real estate qualifies as a rental business (which is usually the case if rent agreements are acquired by the purchaser together with the real estate), the sale is treated as a transfer of a going concern, which is outside the scope of VAT. Consequently, the transaction as such does not result in an input VAT correction, but the purchaser assumes any open input VAT correction volumes of the seller. This means that input VAT correction periods (which in the case of real estate is 10 years) do not recommence on the acquisition of the real estate but the purchaser is obliged to continue any open input VAT correction periods as legal successor of the seller.
Corporate income and trade tax
As mentioned above, rental income from real estate is subject to income tax (at a rate of up to 45 per cent, if recognised by individuals) or to corporate income tax (at a rate of 15 per cent, if recognised by corporations), in both cases there is a solidarity surcharge (5.5 per cent on the income tax liability). This applies irrespective of whether or not the owner of the real estate has a PE or is even resident in Germany; income from German real estate is per se German source income. In addition, trade tax (at a rate set by the relevant municipality; the mean average in 2019 was 15.26 per cent4) becomes due if the relevant real estate income is attributable to the German PE of a (domestic or foreign) business enterprise. Since the holding (and letting out) of German real estate does not per se result in the owner having a PE in Germany, foreign investors will often be able avoid trade tax on their rental income.
However, even in the case of a German PE, trade tax may be avoided by applying for the extended trade tax reduction if the requirements for this reduction are fulfilled. The extended trade tax reduction is available only if the activities of the taxpayer concerned are limited to the mere letting of the taxpayer's own real property. Inter alia, any of the following ('harmful') activities may lead to other sorts of commercial activity that could trigger liability for trade tax:
- providing ancillary services to lessees (other than services as customarily provided by a lessor, such as facility management or advertising);
- short-term letting of real estate, in particular parking space (as a rule of thumb, lease terms of six months or more should be considered long term);
- letting of advertising space;
- property development;
- commercial trading in real estate (which, as a rule of thumb, is indicated if a person sells more than three real properties within a five-year term);
- holding of interests in (deemed) trade partnerships; and
- renting out assets other than real estate (which may be challenging if certain integral parts of the relevant piece of real estate qualify as movable assets for tax purposes, such as rack-supported storage systems in logistics buildings, in which case additional structuring measures may have to be undertaken to safeguard the non-application of trade tax).
Certain exceptions from the catalogue of harmful activities apply to certain activities related to climate protection-related investments, such as the provision of electrical power via electricity filling stations on parking slots for tenants.
Trade tax is not deductible for corporate income tax purposes but may be credited (up to a certain limit) against individual income tax.
Acquisition and construction costs relating to real estate may not be deducted immediately but need to be capitalised. Acquisition costs for land may not be depreciated whereas acquisition and construction costs for commercial buildings that form part of the fixed assets are, as a general rule, subject to a linear depreciation of 3 per cent per year if the application for the construction permit for the building has been filed after 31 March 1985. Notary fees, fees levied by the land registry (e.g., for a land charge) and RETT are treated as ancillary acquisition costs and, therefore, have to be capitalised as well.
Interest payments for loans that were taken out to finance the acquisition of the German real estate are, as a general rule, deductible whereas interest on loans taken out to replace equity financing after the acquisition are not treated as deductible by the tax authorities. However, any deduction of interest expenses is subject to the interest stripping rules.
As a general rule, not only interest expenses in the narrow sense of the word (irrespective of whether relating to a bank loan, a corporate bond or a shareholder loan) but also any other financing expenses (e.g., debt discount expenses or prepayment penalties) fall within the scope of the interest stripping rules.
Interest stripping rules
The interest stripping rules provide that interest expenses incurred by a business enterprise (which may be a corporation, a partnership or a fiscal unity) in a given fiscal year are deductible up to the amount of interest income received in the same fiscal year. Although it is subject to debate in the legal literature whether a non-resident taxpayer who rents out German real estate is considered to engage in a German business enterprise and therefore subject to the interest stripping rules, the German tax authorities generally also apply the interest stripping rules to such non-resident taxpayers.
Any net interest expenses, namely any interest expenses in excess of interest income, may be deducted up to an amount of 30 per cent of the earnings before interest, tax, depreciation and amortisation (EBITDA) of the relevant fiscal year only. The EBITDA is defined as the taxable income before the application of the interest stripping rules, minus interest income, plus interest expenses and tax effective depreciations.
Interest that is not tax deductible under the interest stripping rules will be carried forward to subsequent years and may in principle be claimed as a deductible expense in the future, subject to the same restrictions. To the extent that the interest expenses do not reach the 30 per cent EBITDA threshold, excess EBITDA will, as a general rule, also be carried forward, but only to the subsequent five business years.
If one of the following three exceptions applies, the interest stripping rules are not applicable and interest expenses are, in principle, fully deductible.
First, there is an exception where the amount of net interest payable by the business enterprise claiming the interest deduction does not reach an amount of €3 million per business year. This is a threshold rather than an allowance; once the enterprise has to pay net interest in an amount of €3 million or more, the full amount of interest is subject to the interest stripping rules, not only the excess amount.
Second, an exception applies where the business enterprise claiming the interest deduction is not, and may not be, a member of a consolidated group under the International Financial Reporting Standards (IFRS) or, if the IFRS are not applicable, other applicable accounting standards.
Third, there is an exception where the business enterprise claiming the interest deduction is able to demonstrate that its equity ratio is not more than two percentage points lower than the average equity ratio of the group to which it belongs, based on IFRS or, if the IFRS are not applicable, under other applicable accounting standards.
However, these last two exceptions do not apply if more than 10 per cent of the net interest of the company is paid to a (direct or indirect) shareholder who holds more than 25 per cent of the share or nominal capital, a party related to that shareholder or a third party who can take recourse against such a shareholder or its related party. For such a third party's right of recourse, it is sufficient for the shareholder or related party to be factually liable to the third party with respect to the debt. A legally enforceable claim is not a prerequisite. In particular, a relevant right of recourse exists if a bank grants the company a loan that is secured by way of recourse against either the shareholder or the related party. For these purposes, direct and indirect participations of shareholders are added up to determine whether a shareholder holds more than 25 per cent of the company's share or nominal capital. In respect of the third exception, the shareholder and its related party should not be a member of the same IFRS group as the business seeking to deduct the interest expenses.
For trade tax purposes, 25 per cent of any interest expenses in excess of €100,000 that are deductible for corporate income tax purposes (i.e., not subject to the interest stripping rules) are added back to the trade tax income.
The deductibility of interest expenses is always subject to strict anti-hybrid mismatch rules.
The letting of German real estate is, as an entrepreneurial activity, generally within the scope of VAT but, as a matter of principle, VAT-exempt. To facilitate the deduction of input VAT, landlords will often want to waive the VAT exemption. However, this requires, subject to certain alleviations for older buildings, that the relevant tenant uses the rented space exclusively for entrepreneurial activities that do not exclude the deduction of input VAT (whereby the tax authorities apply a 5 per cent de minimis rule for harmful activities). Therefore, a waiver of the VAT exemption may, as a general rule, not be declared if the rented space is used, for example, for residential purposes or by public authorities, banks or insurance companies.
The holding of German real estate is subject to land tax. Land tax is levied on a standardised land tax value determined by the local tax office; the standardised land tax value is generally much lower than the market value of the property. The tax rate depends on the specific type of property (for retail space and commercial offices: 3.5 per mille) and is further subject to a multiplier that is set by the relevant municipality (the mean average of all German cities with over 20,000 inhabitants: 543 per cent).5
Landlords are generally entitled to pass on the land tax charges to the tenants as ancillary costs under the rent agreements.
A reform of the land tax system has been adopted by the legislature and will come into force as of 1 January 2025. The background of this reform is that the German Federal Constitutional Court declared that the provisions on a standardised land tax value were, to a certain extent, incompatible with the constitution. The new land tax rules provide for a valuation of real property based on fair market value (as opposed to the outdated uniform land tax values used currently), which is then multiplied by a uniform factor (known as the basic federal rate) and a multiplier determined by the municipalities. Further, the federal states will be entitled to, and some federal states have already announced to, opt out of the federal system and to adopt their own land tax systems instead.
Capital gains taxation
As a general rule, not only rental income from German real estate, but also capital gains from the sale of German real estate are subject to corporate income tax in Germany. The tax authorities may impose a withholding obligation on the purchaser with respect to capital gains tax if the seller is a non-resident taxpayer. Trade tax applies only if the sold real estate is attributable to a German PE of the seller.
RETT and VAT
As regards RETT and VAT, the rules outlined above with respect to the acquisition also apply to the exit.
iv Acquisition of shares in a real estate company
The taxation of investments into real estate companies depends on the legal form of the relevant entity.
As opposed to the direct acquisition of real estate (which is generally subject to RETT, see Section II.iii), the acquisition of shares in a real estate holding entity triggers RETT only if certain thresholds are met. In particular, RETT is triggered in a share deal if (1) 90 per cent (or more) of the shares or partnership interests are, within a time period of 10 years, directly or indirectly transferred to new shareholders or partners; or (2) a transaction results in 90 per cent (or more) of the shares or partnership interests being (directly or indirectly) held by the same acquirer (or a group formed by the acquirer and affiliated entities). In the first case (i.e., transfer of 90 per cent or more within a 10-year period), the RETT is owed by the real estate holding entity; in the second case (i.e., transaction resulting in 90 per cent or more being held by one shareholder or partner or by such person and affiliated entities, as the case may be), the RETT is owed by the acquirer. If a transaction falls within the scope of both rules, only the first one applies. RETT triggered at the level of the real estate holding entity qualifies, as a matter of principle, as an immediately deductible business expense (whereas RETT triggered at the level of the acquirer would need to be capitalised as part of the acquisition cost).
As a general rule, the transfer of shares in corporations as well as the transfer of partnership interests is outside the scope of VAT as the acquisition, the holding and the sale of shares is per se not considered an entrepreneurial activity for VAT purposes. However, if the transfer of the shares is part of the seller's business, it is within the scope of VAT if the purchaser has its seat in Germany. In this case, the transfer of shares is generally VAT-exempt unless the seller opts for VAT. The VAT option requires that the purchaser be an entrepreneur too.
Corporate income and trade tax
Investments into partnerships are, for corporate income tax purposes, in principle, treated like direct investments owing to the transparency of partnerships for income tax purposes.
Since corporations are not transparent for income tax purposes but rather are corporate income taxpayers themselves, two levels of taxation have to be considered.
Level of corporation
At the level of the real estate holding corporations, the rules for direct investments apply (see Section II.iii).
Level of shareholder
Dividends paid by a German resident corporation to the shareholder are, as a matter of principle, subject to German dividend taxation. The taxation of dividends depends on whether the shareholder is an individual or a corporation. Dividends earned by individuals are subject to a 40 per cent exemption for income tax (and, if applicable, trade tax purposes). Dividends earned by corporations are effectively 95 per cent exempt from corporate income tax unless the shareholder holds less than 10 per cent of the shares in the corporation; the 95 per cent exemption also applies to trade tax (if applicable at all) if the shareholder holds at least 15 per cent of the shares in the corporation. The tax on dividends is levied by a dividend withholding tax at a rate of 25 per cent (plus 5.5 per cent solidarity surcharge thereon, resulting in a total rate of 26.375 per cent) to be deducted from the gross dividend by the relevant corporation and which is definitive in the case of individual shareholders holding the shares as private assets. With respect to dividend payments to foreign shareholders who are entitled to a reduction or exemption from dividend taxation under a double tax treaty or the EU Parent-Subsidiary Directive, the corporation may, subject to harsh anti-treaty shopping rules, obtain an exemption certificate; otherwise, such shareholders have to apply to the tax authorities for a (partial) refund of the withholding tax.
Interest on shareholder loans is taxable at the level of the shareholder if the shareholder is resident in Germany or has a German PE to which the interest income is attributable. Non-resident shareholders are, as a general rule, taxed on interest income from shareholder loans if the relevant loans are secured by German real estate unless the EU Interest and Royalties Directive applies or a double tax treaty provides for an exemption of such interest income.
VAT and other taxes
No VAT and no other taxes apply at the level of the shareholder during the rental phase.
Capital gains taxation
Capital gains from the sale of partnership interests are, as a general rule, subject to the tax rules for direct investments (Section II.iii). Therefore, trade tax on a capital gain, if any (provided that the income of the partnership is generally subject to trade tax), would become due at the level of the partnership itself.
As a general rule, capital gains from the sale of shares in a German resident corporation are subject to taxation in Germany unless a double tax treaty provides otherwise. Most of the recently concluded or amended treaties, however, provide for a real estate company clause according to which Germany is entitled to tax capital gains if the shares derive more than 50 per cent of their value from German real estate at the time of the sale of the shares. However, capital gains are subject to a 40 per cent exemption if realised by individuals (unless the shares are held as private assets in which case a combined income tax and solidarity surcharge rate of 26.375 per cent applies) and subject to a 95 per cent exemption if realised by corporations. Furthermore, according to a recent decision of the German Federal Tax Court, capital gains realised by a non-resident corporation that does not have a PE to which the capital gain is attributable are exempt not only to the extent of 95 per cent, but even fully from German taxation.
RETT and VAT
As regards RETT and VAT, the rules outlined above with respect to the acquisition also apply to the exit.
Regulated real estate investment vehicles
i Regulatory framework
The German taxation of investment funds has been reformed with effect as from 1 January 2018. As a matter of principle, investment funds are not transparent for tax purposes so that the taxation at the level of the investor and the taxation at the level of the fund needs to be differentiated. Special investment funds may opt out of this tax regime and apply a semi-transparent taxation regime.
ii Overview of the different regulated investment vehicles
German regulated investment vehicles are public investment funds and special investment funds.
Public investment funds are funds that meet the following criteria:
- they are subject to investment regulation;
- the investors have an annual right to cancellation or redemption;
- they must apply the principle of risk diversification;
- they make only passive investments;
- they invest at least 90 per cent of their value in certain legally defined asset classes (e.g., real estate); and
- they are subject to restrictions as regards credit financing.
Special investment funds are investment funds that are not structured for investment by the public but rather for special institutional investors or groups of investors. Special investment funds have, as a general rule, more than €10 million under management and often only one investor.
iii Tax payable on acquisition of real estate assets
Investments into real estate undertaken by investment funds are, generally speaking, subject to the same taxes as investments by other types of investors.
iv Tax regime for the investment vehicle
As regards RETT, VAT and land tax, investment funds are, generally speaking, subject to the same rules as other types of investors. Certain special rules apply, however, on the VAT treatment of the fees paid by the fund to the investment management company.
As regards income tax, public investment funds pay corporate income tax and the solidarity surcharge (at a combined rate of 15.825 per cent) on their rental income and capital gains. Unless an investment fund engages in commercial activities (including the active commercial management of German real estate unless the revenues from the active commercial management fall short of 5 per cent of the total revenues), its income is not subject to trade tax.
Special investment funds may opt for a special tax regime (semi-transparent taxation) under which the fund's income is assessed at the level of the fund but taxed at the level of the investor. However, an exception applies to capital gains that are (if not distributed to the investors) not taxed but carried forward.
v Tax regime for investors
Distributions and capital gains from the disposal of investment fund shares are taxable as ordinary income at the level of the shareholders. However, a 60 per cent exemption applies if the relevant fund invests at least 51 per cent in real estate (and an 80 per cent exemption applies if at least 51 per cent are invested in foreign real estate).
In the case of special investment funds that have opted for semi-transparent taxation, the investors are taxed on the rental income and distributed capital gains of the fund.
Real estate investment trusts and similar structures
i Legal framework
Since 2007, REITs may be established in Germany. However, they are not very common in Germany. Currently, only five German REITs exist.6
ii Requirements to access the regime
REITs are stock corporations that meet the following requirements:
- they have a nominal share capital of €15 million or more;
- at least 15 per cent of their shares have to be held by shareholders that do not hold more than 3 per cent of the voting rights;
- no single shareholder must hold more than 10 per cent of the shares;
- at least 90 per cent of the annual profits must be distributed to their shareholders;
- at least 45 per cent of the aggregate book value of the real estate assets in the consolidated annual accounts should be backed by equity financing; and
- residential properties built prior to 1 January 2007 are not held.
iii Tax regime
A German resident REIT is fully exempt from corporate income and trade taxation.
iv Tax regime for investors
Dividend distributions and capital gains are taxed as capital income at the level of the shareholders. The REIT has to deduct withholding taxes at a rate of 25 per cent (plus 5.5 per cent solidarity surcharge thereon, resulting in a total rate of 26.375 per cent) from any dividend distributions. For individual shareholders that hold the shares as private assets, the withholding tax is definitive.
v Forfeiture of REIT status
In the case of non-compliance with the requirements mentioned above, the REIT may lose its special tax status and become taxable as a normal corporation.
International and cross-border tax aspects
i Tax treaties
Germany has a well-developed network of double tax treaties with more than 100 countries in the world.7 Most of the double tax treaties concluded by Germany follow the OECD Model Tax Convention8 and provide that Germany is entitled to tax income from real estate located in Germany but exempts income from foreign real estate.
ii Locally domiciled vehicles investing abroad
As a matter of principle, German taxpayers are subject to German taxation on their worldwide income. Double tax treaties concluded by Germany typically provide for the exemption of income from foreign real estate. However, some double tax treaties contain a subject-to-tax clause so that the exemption applies only if the source country effectively taxes the real estate income. In the absence of an applicable double tax treaty, foreign taxes are credited against the German income tax liability.
It remains to be seen whether the recently adopted RETT reform (see Section I.ii) will have the effect that we will see fewer share deals, and instead more asset deals, on the German market, or whether alternative RETT-efficient structures (e.g., involving professional RETT blocker investors or unit deals) will become more common. Further, it is already obvious that the coronavirus crisis will have a huge impact on the further development of the real estate market in Germany, as (1) many market participants (both investors and tenants) have been (and still are) suffering from severe losses of income; and (2) it is to be expected that the pandemic will lead to a structural change in the demand for certain types of assets (e.g., decreased demand for office space versus increased demand for suburban residential space).
1 Johann Wagner is a partner at Gleiss Lutz.
2 This mean average is based on the trade tax multipliers of the German cities with over 20,000 inhabitants (see www.dihk.de/de/themen-und-positionen/wirtschaftspolitik/steuer-und-finanzpolitik/hebesaetze-29284 as at 7 May 2021).
3 For further guidance, refer to the Identical Decrees of the Highest Tax Authorities of the Federal States dated 20 September 2017, Federal Gazette 2017, Part I, p. 1328.
4 See footnote 2.
5 See link at footnote 2.
6 See https://de.wikipedia.org/wiki/Real-Estate-Investment-Trust#Deutsche_REITs as at 3 May 2020.
7 See the 'List on the Status of Double Taxation Treaties and Other Treaties in the Field of Taxation and of Treaty Negotiations on 1 January 2019', Federal Gazette 2019, Part I, p. 31.
8 The Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital.