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Corporation tax

The standard rate of corporation tax for both residents and non-residents is 25%.  A ‘solidarity surcharge’ is also levied resulting in an effective rate of 26.375% which applies to companies which hold German property regardless of their residence.  Dividends received from another company are 95% tax exempt. Profits are reportable for the calendar year (1 January to 31 December) in which the accounting year ends.

No tax is withheld on rental payments to non-resident companies holding German property.

German thin capitalisation rules are applicable to non-resident companies holding German real estate, which generally require a debt to equity ratio of 1.5:1.

Furthermore, trade tax is charged by local communities at rates ranging between 9.1 and 19.7% on profits and is deductible from the corporation tax base, resulting in a lower effective rate.  The tax base for trade tax varies slightly from that for corporation tax, e.g. interest on long term debt is only 50% deductible.  Property holding companies performing only a passive management function may be exempt.  Non-resident property owning companies with no permanent establishment in Germany are not subject to trade tax.

Capital gains

Capital gains on the sale of German property are subject to corporation tax at the standard rate for both residents and non-residents.  Trade tax is also applicable at the relevant rate, except for non-residents with no permanent establishment in Germany.  Capital gains realised by a company on the sale of shares in a property holding company are 95% exempt. Although there have been recent rumours that this exemption may be abolished, no official plans have been published in this respect.

Property tax

German real estate owned at the start of the calendar year is subject to annual property tax at 1% to 1.5% (depending on the location of the property) on the specially assessed value of the property (dependent on the rental value and age of the property).  The tax payable is deductible from profit taxes such as trade tax and corporation tax.

Transfer tax

The transfer of German real estate (or of 95% or more of the shares in a company or partnership holding German real estate) is subject to a real estate transfer tax (RETT) of 3.5 % on the purchase price (on transfer of the property) or a specially assessed value as above (on transfer of shares).

VAT

VAT registration is compulsory if taxable supplies exceed €50,000 in the current year and €17,500 in the previous year.  VAT is charged at the standard rate of 16% (expected to be 19% from 2007) or a reduced rate of 7%.  The transfer of real estate is not subject to VAT, however, it is possible to ‘opt to tax’ depending on the purchaser’s VAT status.


The above is for general information purposes only. It is not intended to be comprehensive or to provide any specific tax advice.