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Changes in Taxation of Non-Resident Investors in Regulated German Real Estate Funds

Germany
26 Jul 2010

On 19 May 2010 the latest draft of the 2010 Annual Tax Act was introduced. This draft presents a number of tax-related changes including a change that would have a significant impact on the tax treatment of non-resident investors in regulated German public real estate funds. However, the enactment of the 2010 Annual Tax Act is not expected before the end of this year and the draft may be subject to yet more amendments before the legislative process is finalised. Taxand Germany analyses the changes included in the latest draft and their implications for non-resident investing in regulated German public real estate funds.

Before the draft was produced non-resident investors in German public investment funds were not subject to a limited tax liability in connection with rental income and capital gains on the disposal of real property (holding period of 10 years or less) generated by the fund. Non-resident investors in German "special funds" within the meaning of the German Investment Tax Act i.e. funds which do not have more than 100 investors and none of the investors are natural persons, were subject to a limited tax liability in connection with rental income and capital gains on the disposal of real property (holding period of 10 years or less), initially subject to a withholding tax of 25%. However, the withholding tax could be credited against the investor's corporate income tax provided the required tax filings were undertaken with the German tax authorities. The investor would then be taxed on a net basis, e.g. financing costs for acquiring the fund unit would be deductible.

The latest draft of the 2010 Annual Tax Act will not change the tax treatment of non-resident investors in German "special funds" and such investors will continue to be subject to a limited tax liability. However, the tax treatment of non-resident investors in German public investment funds, such as German real estate funds, will change significantly. These investors will lose their tax privilege and now also be subject to a limited tax liability in connection with real estate income and capital gains at a withholding tax rate of 25%. This withholding tax is a tax on gross income / capital gains, i.e. not a deduction of costs at investor level.

We would like to point out, however, that a non-resident investor in German real estate funds may be able to reduce the tax rate to 15% provided that the investor files a refund claim with the German tax authorities. However, non-resident investors will not be obliged to file a German tax return.


Taxand's Take


The changes to German tax law proposed in the 2010 Annual Tax Act will have a significant consequence for non-resident investors in regulated German public real estate funds. The German legislator is therefore closing yet another tax loophole. As a result, an advantage regulated public funds had over regulated special funds and unregulated funds would therefore be lost. However, please note that one important advantage still remains for non-resident investors, namely the tax-free disposal of regulated real estate fund units by non-resident investors, regardless of whether the German fund is a public fund or a "special fund".

Your Taxand contacts for further queries are:
Dr Carsten B?decker
T. +49 211 5660 25020
E: carsten.boedecker@luther-lawfirm.com

Carsten Ernst
T: +49 211 5660 25030
E: carsten.ernst@luther-lawfirm.com

Astrid Binger
T: +49 211 5660 25035
E: astrid.binger@luther-lawfirm.com

Friederike Schmitz
T: +49 211 5660 25032
E: friederike.schmitz@luther-lawfirm.com

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