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New decree affecting trade tax position of German real estate investment

15 Apr 2009

On 1 April 2009 the German Federal Ministry of Finance issued a new decree on the tax treatment of special purposes entities owning just one asset.

Although the background of the decree applies to the leasing of aircraft rather than property, the decree may affect the trade tax position of real estate investment in Germany.

Usually, trade tax on rental income can effectively be circumvented by either avoiding a German permanent establishment (PE) or by applying the so-called extended trade tax deduction for real estate entities, the activity of which is strictly limited to pure property administration.

On the basis that a German PE is effectively avoided, no adverse implications arise from the decree for German real estate investment for corporate investors. Adverse implications could arise, however, if a PE has in fact been constituted, either deliberately or inadvertently, so that trade tax could only be avoided using the extended trade tax deduction.

Based on the decree, the tax authorities might deny the favourable deduction in more cases than before. It may now also be refused in certain cases where the sale of the property before the end of its useful life time is, from the very beginning, an integral part of the economic plan. If the more detailed conditions outlined in the decree are fulfilled, the authorities may now qualify the rental activity as harmful trading rather than as pure property administration. Consequently, no shelter from an effective trade tax burden would exist any longer.

Depending on the specific case facts, valid arguments may be made as a defence against the adverse application of the decree.

Taxand's Take

The conclusion may be drawn that avoiding a German PE has become even more important after the decree than it has ever been. Taxpayers may want to review their position in this respect.

To find out more about the implications of this decree in Germany, your global Taxand real estate tax team is here to help. Either contact your nearest Taxand real estate tax advisor or our German expert:

Ulrich Siegemund
T. +49 6196 592 16364

Taxand's Take Author