Selling and transferring German real estate

DIRECT SALE OF REAL ESTATE

Resident and nonresident Individuals

Individual Income Tax

lf an individual receives rental income in respect of a German property, capital gains realised on the disposal of that property are only subject to personal income tax if the period between acquisition and disposal does not exceed ten years and the property was held as private property. In case the real property was privately used at least in the disposal year and the two previous years, the capital gain is tax exempted. lf the rental activities have been qualified as 'business income instead, capital gains are always subject to income tax as ordinary business income. The capital gain is calculated as the difference between the sales price and the acquisition costs minus the depreciation and transaction costs.

With regard to real property and other specific assets, German tax law provides a special tax free reserve for profits from the sale of these assets (such as real property), which means that the realised proceeds of the sale, including the hidden reserves, can be used under certain circumstances in full to finance a new investment, thus protecting the liquidity position. This rule applies also to business assets of individuals or partners of a partnerships liable for individual income tax.

Trade Tax

In case the rental activity qualifies as 'business income', the capital gain should be generally subject to trade tax. For individual income tax purposes, trade tax is generally deductible with a standardised calculation method. A taxpayer that merely holds and administers their own real estate may apply for a so-called ‘extended trade tax deduction’ (Erweiterte Gewerbesteuer-Kürzung). Such a deduction is made from the tax base for trade tax purposes of income derived from merely passive rental activities, thereby reducing the tax base for such activities to zero and effectively leading to an exemption from trade tax. This exemption can also avoid trade tax on capital gains.  However, several restrictions or prerequisites have to be considered in order to benefit from this exemption.

Losses

Losses from private sales transactions may only be offset against gains from private sales transactions. Loss carry forwards and carry backs are possible under certain conditions. For further details see above (in section “DIRECT HOLDING OF REAL ESTATE - Resident and nonresident Individuals”).

VAT

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.

Real Estate Transfer Tax (RETT)

The direct sale of real estate triggers RETT in Germany irrespective of whether such a seller 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.

Special Rules for Nonresident Individuals

Non-resident individuals are treated in a similar way as resident individuals. However, losses arising from the sale of German real estate can only be offset against other German taxable income. The German right of taxation for rental income is in principle not restricted, even in the event of the existence of double taxation agreements. Furthermore, they will not be granted the so-called basic allowance of 9,168 euros (2019), that is exempt from tax.

Resident and nonresident Corporations

Corporate Income Tax

Business income of a corporation is taxed at a rate of 15.825%. The corporate income tax on capital gains from the sale of real property is part of the regular business income of the corporation and is calculated as the difference between the sales price and tax book value of the real property.

With regard to real property and other specific assets, German tax law provides a special tax free reserve for profits from the sale of these assets. For further details see above (in section “DIRECT SALE OF REAL ESTATE - Resident and nonresident Individuals”).

Trade tax

Capital gain from the sale of real property should be generally subject to trade tax. A taxpayer that merely holds and administers their own real estate may apply for a so-called ‘extended trade tax deduction’ (Erweiterte Gewerbesteuer-Kürzung). For further details see above (in section “DIRECT SALE OF REAL ESTATE - Resident and nonresident Individuals”).

VAT

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. For further details see above (in section “DIRECT SALE OF REAL ESTATE - Resident and nonresident Individuals”).

Real Estate Transfer Tax (RETT)

The direct sale of real estate triggers RETT in Germany irrespective of whether such a seller is a resident or foreign individual, partnership or corporation. For further details see above (in section “DIRECT SALE OF REAL ESTATE - Resident and nonresident Individuals”).

Special Rules for Nonresident Individuals

Non-resident corporations are treated in a similar way as resident corporations. In case German real estate is held by a foreign company and rented without providing any additional service to the real property in Germany is not considered to be a permanent establishment in Germany, the capital gain is still subject to corporate tax. The income may not be subject to trade tax due to the lack of a permanent establishment in Germany. The German right of taxation for capital gains related to real property is in principle not restricted, even in the event of the existence of double taxation agreements.

INDIRECT SALE OF REAL ESTATE

Resident and nonresident Individuals

Individual Income Tax

Capital gains income from private investments are taxed separately at a flat rate of 25% (26.375%, including the solidarity surcharge). Where a shareholding of at least 1% has been held at any time during the five years prior to a sale, 60% of the capital gain is taxed at the regular (progressive) rate. This also applies to capital gains when the underlying assets qualify as business assets. Losses may only be netted with other capital income.

Value Added Tax (VAT)

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.

Real Estate Transfer Tax (RETT)

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.

Special Rules for Nonresident Individuals

Non-resident individuals are generally treated similar like resident individuals. For capital gains from an alienation of shares below 1% shareholding, Germany has generally no taxation right. In case a double taxation agreement exists, the taxation right is usually allocated to the resident state. However, certain double taxation agreements might provide different rules for the sale of shares in German real property corporations.

Resident and nonresident Corporations

Corporate Income Tax

Capital gains from sale of shares of domestic and foreign corporations are effectively 95% exempt from corporate income tax and trade tax. Losses are not utilisable.

Value Added Tax (VAT)

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.

Real Estate Transfer Tax (RETT)

Certain transactions are deemed to constitute such a transfer. For further details see above (in section “INDIRECT SALE OF REAL ESTATE - Resident and nonresident Individuals”).

Special Rules for Nonresident Corporations

Non-resident corporations are generally treated similar like resident corporations. However, capital gains from the alienation of shares in a German corporation by a nonresident corporation should generally be fully tax exempted in Germany. In case a double taxation agreement exists, the taxation right is usually allocated to the resident state. However, certain double taxation agreements might provide different rules for the sale of shares in German real property corporations.

REAL ESTATE TRANSFERS WITHIN A GROUP

Individual and Corporate Income Tax and Trade Tax Aspects

In general, the transfer of real estate within a group follows the same rules and principles as outlined above for the various scenarios. This is also applicable within a fiscal unity for corporate tax purposes. In this case the capital gain is still taxable because the income is determined separately for the controlled entities and the controlling entity within a corporate income tax fiscal unity. The same applies for the indirect transfer of share of real property-owning entities. The transfer of assets between different business and partnerships of an entrepreneur can be done at book value. 

Value Added Tax (VAT) Aspects

For VAT purposes the transfer of real estate within a group follows the same rules and principles as outlined above for the various scenarios. However, a real estate transfer within a VAT fiscal unity is generally excluded from a VAT treatment.

Real Estate Transfer Tax (RETT) Aspects

For RETT purposes the transfer of real estate within a group also follows the same rules and principles as outlined above for the various scenarios. However, intra-group restructurings can be exempted from RETT if certain very strict conditions are met.

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