Real estate investments in Germany by foreign (institutional) investors – Tax Aspects

1. Possible structure of the acquirer of real estate in Germany

Foreign institutional investors usually acquire real estate in Germany through companies (special purpose vehicle - SPV) with their legal seat in Germany (legal form usually a limited liability company (GmbH) or a limited liability company & Co. limited partnership (GmbH & Co KG) or with their legal seat abroad (usually a corporate entity, e.g. a limited liability company (S.a.r.l.) in Luxembourg). A purchase of real estate through a domestic investment fund, which may be fiscally advantageous, will generally not be intended economically due to the debt ratio limited by the investment law.

A limited liability company (GmbH) is a corporate entity. A limited liability company & Co. limited partnership (GmbH & Co. KG) is a so-called partnership.

2. Taxes on the acquisition of real estate in Germany (real estate transfer tax and VAT)

The acquisition of real estate in Germany by way of an asset deal causes a real estate transfer tax in the amount of between 3.5% and 6.5% (depending on the State) of the purchase price. By way of a share deal, where company's shares in real estate companies are acquired, real estate transfer tax can be avoided under certain requirements.

The acquisition of a rented real estate (asset deal) usually causes no VAT on the purchase price (so-called sale of the complete business). In certain circumstances (acquisition of undeveloped land, unlet building) VAT (19%) may apply. This sales tax burden can be reduced depending on the use of the real estate in whole or in part. A share deal causes no sales tax on the purchase price of the shares.

3. General remarks on the calculation of current tax income regarding real estate in Germany

The rental income generated (including rental costs) is tax-relevant revenue. The costs arising in connection with the rental of the real estate (e.g. facility management, financing costs) are basically tax deductible.

The (possibly pro-rata) acquisition costs of the building (but not the land) are tax deductible by way of depreciation (depreciation rate between 2.00% and 3.00% depending on age and use of the building).

Debt interest, which is to be paid in connection with the financing of the real estate, basically results in tax reduction. This applies in principle to both debt interest on bank loans as well as debt interest on shareholder loans. Restrictions on debt interest deduction by the so-called interest barrier rule (i.e. no or only limited debt interest deduction depending on various circumstances) must be observed.

The ownership of a real estate results in a land tax which is to be paid quarterly.

4.Current Taxation of a real estate limited liability company (Immobilien-GmbH)

The profits of the real estate limited liability company (Immobilien-GmbH) in Germany are subject to corporate income tax in the amount of 15.825% (including solidarity surcharge) and trade tax (between approximately 10.00% and approximately 20.00% - depending on the particular community).

The trade tax can be avoided only if the real estate is rented long term and provided no further special services (e.g. no renting of operating facilities) are rendered.

5. Current Taxation of a real estate limited liability company & Co. limited partnership (Immobilien-GmbH & Co. KG)

The profits of a limited liability company & Co. limited partnership (GmbH & Co. KG) are not subject to corporate income tax in Germany. They are attributed to the partners with the result that the partners (if they are corporate entities) are subject to corporate income tax in the amount of 15.825% (including solidarity surcharge).

The profits of a limited liability company & Co. limited partnership (GmbH & Co. KG) are subject to trade tax, if they cannot be avoided due to the above constellations (see paragraph 4).

Side note: A S.a.r.l. (foreign corporate entity) & Co. KG is usually not subject to trade tax even if no permanent establishment (in particular not the place of management) is maintained in Germany.

6. Current Taxation of a foreign corporate entity with real estate in Germany

A foreign corporate entity with profits from real estate in Germany is also subject to corporate income tax in the amount of 15.825% (including solidarity surcharge) – the so-called limited corporate income tax liability. The right of taxation on income from real estate is basically assigned to Germany under double taxation agreements.

The profits of the foreign corporate entity are generally also subject to trade tax. In certain circumstances, the trade tax can be avoided. This applies especially, if the foreign corporate entity has no permanent establishment (place of management) in Germany.

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