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News & Knowledge

Germany: Real estate tax compliance for real estate assets with foreign investor participation

5th February 2019
Rudolf Kettel - Auditor (Fuerst und Partner GmbH)

This article by Rudolf Kettel from MSI's Nuremberg based member firm Fuerst und Partner GmbH provides insight into the so-called inbound structures for real estate located in Germany. This means foreign or domestic property companies where both domestic and foreign natural persons participate in. These companies usually have revenues subject to domestic tax from the real estate leased in Germany.

Additional tax-related links also exist in the VAT and real estate transfer tax areas. Furthermore German  Business Tax, donation and inheritance tax could cause problems.

In the last few years, fundamental new regulations arose from case-law- and legislation-related decisions. Not only must the case-law of the German Supreme Court responsible for tax issues, the Federal Finance Court, be observed, but also the case-law of the European Court of Justice.

In addition to that, fundamental reforms also arose from the GAAR- BEPS project of the OECD and the ATAD directive of the EU, which had to be implemented by the German legislature.

Status quo

The real estate transfer tax will be tightened with the new  Tax Amendment Act. REIT structures now require a minimum participation of 10 % in the company assets. The real estate transfer tax benefits in the affiliated group, which the legislature created for restructuring efforts in the group, are on the ECJ trial due to abetment suspicions.

The implementation of the VAT directive on property payments substantially broadened the term and increased the complexity of VAT once again. Not to mention the correction rules (Section 15a of the Value Added Tax Act) in case of changes in use or sales of real estate.

Though the case-law with respect to the 15 % limit for purchase-related expenses clarified the legal situation, it also tightened it further.

The obligation to keep books for foreign companies with domestic real estate assets has been confirmed by the Federal Finance Court. In addition to that, under certain circumstances, an obligation to pay business tax may be imminent as well. If also a domestic taxpayer with unlimited tax liabilities participates in these foreign real estate companies, then also this person/entity has to observe the taxation of foreign-sourced income according to the Foreign Tax Act.

Last but not least, the limited tax liability has been extended to revenues from the sale of shares in real estate companies.

Personal risks and risks for the company and for all people participating in the process of creating tax returns are very high due to the significantly increased complexity in this area. After the penal provisions have been tightened, errors in the German tax return must be avoided. Real estate tax law is a very complex business.

What can be gained from a tax compliance system for real estate companies?

According to the management opinion that can be looked up in the utilization decree for Section 153 of the Tax Code, with the introduction of a tax compliance management system, errors can be corrected and are not subject to prosecution. This only applies if this kind of system was introduced and is actively used by the company. Error correction not subject to prosecution is even possible if a tax auditor detects an error.

We will be pleased to help you with our experience and knowledge if you plan to introduce, monitor or validate a tax compliance system. An investment that pays off, as measured by the risks, not only regarding the tax risks, but also regarding the optimisation of workflows.

About Fuerst und Partner GmbH - Nuremberg

“Fuerst and Partner GmbH” cover all issues concerning tax consulting, financial auditing, legal counseling and management consulting – national and international.

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