In December 2012, Mat catches up with Frau Luise Sange and chats over some common points which new investors in Germany often need to find out:

Hi Luise, having worked closely with our clients now for many years, what typical issues do international clients not appreciate about the German Tax system?

Some of the investors are not aware of the fact that they have to file German income tax returns on an annual basis since they include the rental income into their domestic return. The truth is that Germany has the primary right to tax income from German property comprising rental income and capital gains. This income is calculated on the basis of German accounting principles allowing interest, depreciation, certain refurbishment expenses and other property related costs to be deducted. Due to diverging accounting principles and the fact that the fiscal year in Germany usually is the calendar year the net income will have to be adjusted when transferring it into the domestic returns. In general, German taxes will be credited against income taxes at home, the so-called “double taxation treaty”. Furthermore, it is vital to keep all documents and receipts to prove deductible expenses.

It is often reported that selling a property after 10 years of ownership means that it is free of capital gains tax. Is this true for all individuals, and true for companies as well?

It is true that a capital gain from selling a property after 10 years is exempt from German individual income tax. However, individuals will have to check whether they will need to tax the capital gains at home. In this case a credit of taxes paid in Germany (i.e. nil) would not lead to a reduction of domestic taxes. Only individuals are entitled to the tax exemption in Germany. Corporations cannot claim this relief.

One from that point Luise, one of the decisions an investor needs to take before buying a property is if to buy as an individual or in a company structure. What kind of things guide this decision for each investor?

There are a couple of things which need to be taken into account: The first thing is probably the size of the investment. Especially if you buy the first property in Germany it may be recommendable to buy as an individual to cut down side costs (e. g. incorporation, more complex accounting). These extra costs need to be compared to the benefit arising from lower taxes (individual income tax rates are currently between 14 – 44.31 % as opposed to a flat corporate income tax rate of 15.825 %.).

If there is more than one potential investor a property could be owned jointly leading to a smaller taxable profit and therefore lower tax rates for each individual investor.

What is also important is whether you are a buy-and-hold investor (tax exemption of capital gains may be interesting for individuals) or you plan to build up a larger portfolio (low corporate income tax rates allow you to invest into more property). What also needs to be considered is the question of dividends (withholding taxes in Germany, taxation of dividends at home). The question of dividend taxation and the avoidance of German trade income tax play an important role when deciding whether to use a German corporation (usually a so-called GmbH) or a non-German corporation.

Sounds like there is a good deal to think about then. What must clients do through the year to make filing their tax as simple as possible at the end of the tax year?

It is as simple as this: Keep all property related documents. When in doubt (since they are often in German!) rather keep them and show them to an expert without delay. Usually you should keep in mind to file your travel expense receipts, bank statements, certificates of interest for mortgages taken out and all invoices you may have paid out of your private bank account.

What are the deadline dates for filing tax each year?

In general, the deadline for filing is May 31 of the following calendar year unless you use the services of a German tax advisor. In this case it usually is December 31 of the following year. However, the tax office may ask for an early filing.

Do you speak with the management teams of investor’s properties, and what format do you need management documentation in?

When preparing tax returns for our clients we usually get the information on current rental income and expenses paid from the house account directly from the management company. We mutually agree what documents are delivered in which format and by what date. The client does not have to worry about these issues.

What are the common problems that you see with how international investors arrange their investments and tax affairs?

Very often investors only contact a tax consultant after they have bought the property. If it turns out later that the chosen structure is not tax efficient it may be quite costly to straighten out this mistake (usually additional notary fees and stamp duty of approx. 5 % of the purchase price will have to be paid). Another issue which is often disregarded is VAT and the question whether to opt for VAT for certain business premises to be entitled to input VAT deduction.”

Any top tips from a friendly tax consultant?

You are investing in a foreign country. Some of the correspondence (e.g. letters from the tax office) will inevitably be in German. Still it may be important. You should be aware that German regulations may differ considerably from what you are used to. Early consulting may spare you unpleasant surprises, so we find it is best to speak to us sooner rather than later!

At what point should an investor get in touch with your team if wanting advice on their tax position?

The best time would probably be before the actual investment is made. Ideally you still should have time to set up a corporate structure before buying should you decide so. At the latest, please seek advice when you start getting letters from the tax office asking for payments. In this case it is very likely that your income has been estimated (which is seldom in your favour). Quick action is required!

Thanks Luise, very helpful for our clients and we offer your contact details below for investors to contact you for an initial consultation as the time is right for them to do so.

Luise offers a free tax consultation to all our clients, so please contact her to take advantage of this great service:

Frau Luise Sange

sange@confianza-steuerberatung.de

Confianza Steuerberatung

Weinligstr. 11

04155 Leipzig

Tel: +49 341 2539750