The direct purchase of real estate triggers RETT in Germany irrespective of whether such a purchaser is a resident or foreign individual, partnership or corporation. The parties involved in the acquisition process are considered to be the taxpayers. It is normally specified in the contract that the buyer is obligated to pay the tax liability resulting from the transaction. The tax rates are determined by the German states (minimum rate is 3.5%) and vary between 3.5% and 6.5% of the purchase price of the property depending on the German state in which the real property is located.
Generally, the supply of immovable property is exempt from VAT. However, if the sale is made to an entrepreneur for business purposes, the exemption from the VAT liability can be waived. The buyer is liable to pay VAT under the reverse charge procedure where transactions are subject to RETT and the buyer operates a business. The applicable VAT rate is 19%. The seller of the property may wish to opt for VAT, otherwise he may have to reimburse input tax amounts claimed in the past.
The acquisition of a whole business or an independent part of a business (Geschäftsveräußerung im Ganzen) to an entrepreneur is, in general, also not subject to VAT. Even the disposal of one piece of real estate can fall into this category, if it represents the main business asset. For purposes of input VAT adjustment, the purchaser replaces and ‘succeeds’ the seller.
The purchase price and other acquisition costs (e.g. Real Estate Transfer Tax) which are allocated to buildings can be depreciated over the useful live with predefined depreciation periods for different types of buildings according to the tax law. However, land is not depreciable.
Certain transactions are deemed to constitute such a transfer. This includes the direct or indirect unification of 95% of the shares in a company or partnership that owns real property and the transfer of 95% or more of the shares in such a company or partnership. Also, the 95% direct or indirect change of the partners in a partnership owning domestic real estate will trigger real estate transfer tax if the change is affected within a period of five years. The tax also applies to any transaction that results in an entity directly and/or indirectly owning a 95% economic share or interest in a company owning real estate. The economic share or interest approach requires looking through intermediary companies and adding the direct and indirect participations.
The tax rates are determined by the German states (minimum rate is 3.5%) and vary between 3.5% and 6.5% of the purchase price of the property depending on the German state in which the real property is located. Tax exemptions may apply under certain conditions.
The transfer of shares and partnership interest is generally VAT exempted. However, if the sale is made to an entrepreneur for business purposes, the exemption from the VAT liability can be waived.
The purchase price of the shares reflects the investment book value of the shares and is important for calculating the capital gain when the shares are sold. In Germany, the investment book value is regularly not depreciable. Only an extraordinary depreciation would be possible under certain circumstances for individual income tax purposes if the shares are business assets. For corporate income tax purposes an extraordinary depreciation would not be recognised as deductible expense.
The unused tax losses of a German company can be carried forward indefinitely to offset future taxable income for Corporate Income Tax and Individual Income Tax purposes. Losses up to an amount of EUR 1,000,000 can be offset against the profits of the preceding year. Losses for trade tax purposes cannot be carried back. However, there is a minimum taxation rule and 40% of the income exceeding EUR 1,000,000 cannot be sheltered by tax loss carry forwards but is subject to taxation at regular rates.
In case of a direct or indirect transfer of more than 50% of the shares in a corporation all tax loss carry forwards and current losses generally forfeit (change of control rule). There are three major exemptions. The change of control rule is not applied: (1) if transferor and transferee are ultimately held 100% by the same parent or the direct or indirect parent is involved (so-called intra-group exception); (2) to the extent that the loss company carries taxable built-in gains in its taxable net assets (so-called built-in gains exception); (3) in specific restructuring situations; (4) if the loss company used to have and continues to have the same business and no harmful event takes place, e.g. participation in a partnership, becoming the parent company within a tax group, transfer of assets below the fair market value, etc.. Please note that this rule is currently under review by the German Federal Constitutional Court. Similar rules are also applicable for partnership trade tax losses.