German Property Tax

Whilst it is famous that there are more pages to the German Tax Code than most other countries put together, it is possible to simplify the issues somewhat and make the viability of investments that much easier to understand. This brief has been put together to assist with the early questions regarding tax. The intent of this brief is not to replace the work of a local tax consultant, more to focus your questions that you will ask.

Types of Tax:

Broadly, tax will fall in the following areas:

• Purchase tax
• Local Ground or Property Tax
• Income or Corporation tax
• Capital Gain Tax

In turn then:

Purchase Tax

This is set as a flat levy, regardless of purchase price. Across the whole of Germany the fee is set at 3,5% apart from Berlin and Hamburg who charge 4,5%, clearly a good way of bolstering the city coffers! The purchase tax, or stamp duty is free of VAT, it would be a little harsh otherwise, and is payable prior to completion of the transaction. It is common for the Notary overseeing a contract to make this charge 14 days post contract, so all is in place before completion and there are no hold-ups.

Local Ground or Property Tax

This charge is usually made each quarter by the city, and is based on the land value of the unit [typical examples]. The tax is levied on the assessed value of the property using the basic federal rate of 0.35%. The amount is further multiplied by municipal coefficients to calculate for the final tax due. The municipal coefficient varies by municipality but the average rate is 1.9%. It is common for this tax to be included within the ancillary costs of the rent paid, so effectively paid by the tenant and not being drawn from the net rent as long as the property is occupied. If the property is unoccupied, the fee becomes liable to the landlord. As an example, for a property with an assessed value of 100,000 Eur:

Value = 100,000 Euro

Basic Annual Levy = 0.35%

Basic Tax = 350 Eur per year, or 87,50 Eur per quarter

The thing to remember is that, whilst the unit is tenanted, this is effectively paid from the tenant’s ancillary costs, so not a cost direct to the landlord from the quoted yield of an investment.

Income Tax or Company Tax

Depending on how an investment is structured, you will be liable for individual or company tax on the net income produced. In both cases, there are a number of allowances made against income which include:

• Interest from any finance against the investment [but not the capital repayment element]
• Costs associated with running of the property including maintenance and other items.
• Expenses incurred in running the investment such as trips to view the property and sort management issues etc

Depreciation :here a big allowance is made for the notional depreciation in value of a property due to its age. Depreciation is allowable on the building only, for buildings with land an amount of 70% is attributable to the cost of the property. 2% depreciation is allowed per year for property built 1925 onwards and 2.5% for property before 1925.

Example:

For a 1910 property of 100,000 Eur value again, the calculation for net income liable to taxation might be:

Income

Net Rent [cold rent] € 10,000 Eur [10% net yield]

Expenses

Interest – 4,000 Eur

Maintenance € 500 Eur

Expenses €500 Eur

Depreciation € 1750 Eur

So, total income liable for tax would be 3250 Eur.

This is a very simple case, other factors will perhaps bring the income liable for tax downwards.

Income tax rates for individuals are below for 2010:

Corporation tax is an issue which is best to seek advice upon, but in most cases 25% is the level set for income, after all allowances.

Tax Structures

A common question for a new investor is how should they structure the investment vehicle to ensure it is efficient for tax purposes. The choices centre around purchasing the property in private individual names or as a company structure. First off, it is important to note that the financing of property makes little distinction to the structure used. Security will be taken against the property and income and capital positions analysed of individuals or the individuals standing behind a company. So there are little restrictions on this side. On from this, the aspects to consider are:

What level of income do you expect to receive in Germany
Is it worth setting up a company, or are individual tax rates more favourable?

What are the costs in setting up a company, and the annual running costs of filing accounts?

What liability differences are there with holding property under a company as opposed to an individual?

Are there any aspects with capital gain or inheritance that affect your plans?

It really is advisable to take professional advice on these points. We have a number of tax consultants who are established to help international investors, so please just call when you need this service.

enquiry@proventureproperty.com