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 GERMAN TAX OVERVIEW
The German tax law is very complex and numerous exemptions (and deductions) apply, therefore it is necessary to consult a German tax advisor/accountant in all individual cases. The following information is merely a brief introduction for individual non-resident investors holding property in Germany (as private asset) and must not be viewed as an exhaustive tax guide or tax advice.
Business income and other types of income (German tax law distinguishes seven different forms of income for tax purposes) are out of scope of this brief guide. The following information applies to property held as a private asset only; property held as a business asset is taxed differently.
Tranfer costs
Foreign investors should be informed of the costs of executing a real estate purchase agreement at an early stage in the proceedings. In total, the costs of a real estate transaction amount to approximately 5 -6 % of the value of the purchase price; of this amount 3.5% (Berlin 4.5%) is attributable to real estate transfer tax.
The other costs are notarial fees and fees for the land register. Within the scope of transactions with a greater value, it is possible to reduce the costs and real estate transfer tax by the application of certain corporate law structures.
Another part of the transfer costs is the commission for the real estate agent. In Germany usually the buyer has to pay 3 – 6 % plus VAT (19%) of the value of the purchase price. It depends on the statement in the sales particulars of the real estate agent.
INCOME TAX (INDIVIDUAL)
Income tax is levied on all German income. As a general guide, the tax is progressive and levied at rates of 15-42%. In addition, a solidarity surcharge (to pay for the former East Germany integration) of 5.5% of the total tax due is payable. (The top rate of 42% is only levied on profits exceeding 52,152 euro.)
There are two types of income tax - tax on wages (Lohnsteuer) and tax on income
(Einkommensteuer). The difference is the method of collection; tax on wages is withdrawn at source and paid to the tax office by the employer, while income tax (on income from
self-employment, rental income, investments, etc) is paid directly by the individual taxpayer.
Based on the previous year's tax assessment tax payers have to make tax pre-payments in
quarterly installments (March, June, September, December). The tax return for the year needs to be filed by 31 st May of the year to follow. Adjustments are made for eventual under- or overpayment.
Germany has been undergoing positive changes in its tax law in the last few years. The individual income tax rates have been decreased, from 53% (1998) to 42% (2005) in case of highest rate, and down to 15% from 25.9% as far as lowest rate. (The Merkel government has now agreed on a corporate tax reform to lower the total tax liability of corporations to 29.83% from current 38.65%, possibly effective 1 January 2008. To compensate, some of the many tax avoidance loopholes are to be closed.)
The non-taxable minimum is currently 7,664 euro for single persons (or 15,328 euro for married couples), however, there are some exceptions where this may not apply.
OTHER TAXES
There is a number of other taxes, including VAT (Umsatzsteuer or Mehrwertsteuer), additional sales taxes on certain goods such as alcohol, tobacco, gasoline, etc, other business taxes, church tax, etc. (Church tax of 8% of the income tax is only payable by those officially affiliated with one of the main churches.
VAT has been increased from 16% to 19% (effective 1 January 2007), although a lower rate of VAT applies to certain products, while others (such as medical goods) are exempt.
HOLDING REAL ESTATE
Real estate tax
German property is subject to a real estate tax (Grundsteuer), levied annually. The tax base is the 'assessed value' (Einheitswert). The tax depends on several factors including location, size, use, local municipal coefficient, etc. Typically, for a 1 bedroom apartment in Berlin the tax will be in the region of 200-500 euro p.a. (Real estate tax is generally paid by the tenant.)
Rental income
Rental income is taxed as income (see section on Income Tax) and is subject to the progressive tax rate. Interest on loans provided to finance real estate, expenses and property related cost (eg. management fees, insurance, etc) can be deducted from the taxable rental income.
Depreciation
Real estate is subject to tax depreciation on an annual basis. (Land cannot be depreciated.) Buildings are depreciated over 40-50 years, depending on the year of construction. (2% annual depreciation applies to buildings constructed in/after 1925, 2.5% for buildings constructed prior to 1925.) This effectively lowers the annual tax payable in Germany.
Special rates apply to modernisation of listed (Denkmalschutz) buildings - modernisation costs can be depreciated over 12 years (9% p.a. for the first eight years and 7% p.a. in the next four years). Modernisation of not listed properties follows the standard depreciation rates.
BUYING AND SELLING REAL ESTATE
Transfer tax
Transfer of German property is subject to a transfer tax (Grunderwerbsteuer) - equivalent of stamp duty. Effective 1 January 2007 this tax is no longer set at federal level and comes under authority of local governments. While most states and cities have so far kept the transfer tax at the previous rate of 3.5% (of the purchase price), Berlin has increased the rate to 4.5%. Transfer tax is generally paid by the buyer.
Capital gains
Currently profits made on sales of properties held as a private asset are not taxed if the property has been held for over 10 years. However, there are plans to introduce a (20%) capital gains tax in the coming years. If a property has been held for less than 10 years capital gains are taxed as income (progressive tax rates).
MOST COMMON LEGAL FORMS
Property investors typically choose one of the following legal forms in which to own German
real estate: individual ownership, partnership under civil code, limited company. A partnership is not taxed as a separate legal entity, each partner is liable to pay tax on his share of income from the property according to his individual tax status. While a partnership is easy to establish and handle, a limited company will, due to the formal procedures, incur higher costs (of notaries, accounting) and commercial tax obligations.
NOTES
Germany has concluded double tax treaties with all of world's developed economies.
Please read more about additional Transfer Costs!!
Sources: PriceWaterhouseCoopers; Stb D. Roth; Bundesfinanzministerium
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