The tax system in Germany is very comprehensive and aims to tax workers according to their financial success, while allowing enough income for business investments in work and capital. As a result of this and for fairness, the tax system in Germany is fairly complex and this document can only really be a brief overview and does not replace thorough professional consultation. Assessing a tax situation in detail requires looking at the priorities of each client and finding the best solution with regard to the different taxes, taking into account effort and the costs of setup and management.
If you are in Germany less than 184 days per year and do not reside in Germany, you fall under limited taxation in Germany. This means that you are only taxed on your German income. The income considered to be ‘German income’ depends primarily on the double taxation treaty which is valid between Germany and your home country. Income from tenancies of German real estate is usually considered to be ‘German income’.
Under limited taxation, owners of real estate property do not benefit from tax free amounts (eg, in the case of unlimited taxation, tax free is income of €8652 (2016) and inheritance or gifts to children/spouses of €400,000/€500,000, respectively).
Profits made from real estate are taxed as ordinary income. For determining what is actual taxable income, owners can deduct the interest on bank loans that financed the purchase and other expenses and property related costs (eg, management fees, insurance, legal fees, etc). Moreover, a depreciation of 2% of the building value per year (2.5% for properties built before 1925) can be deducted from the profit. As a result of the various deductions, the ongoing taxable income from an apartment is usually quite low.
For individuals, the taxable income is subject to a progressive income tax rate from 14-42%. Taking into account the depreciation (see above), the tax rate on the rental income is effectively lower.
The profits from the sale of properties held as private assets (held by a private person which has sold less than 3 properties in the last 5 years) are currently exempt from tax if the property was owned for over 10 years. Other special exemptions can apply if the apartment was used by the owners, themselves. If none of these tax exemptions apply, the profit from the sale is taxable like ongoing income. This tax exemption is only applicable for privately owned and sold properties, not for those sold by commercial companies such as a GmbH.
For corporations, the taxation follows a different pattern than it does with individuals. Generally, the taxation takes place on two levels:
The company pays 15.825% income tax (Körperschaftssteuer); commercial tax can usually be avoided if the company is only holding real estate, depending on the setup of the company, the properties and the usage of the properties.
For a German corporation, the profits paid to an individual as a shareholder is taxed with capital gains tax (26.375%) paid by the company. Depending on the respective double taxation treaty and the individual income situation, a reduced tax rate may be applicable (eg, 5-10%). Also, foreign companies may offer better tax rates.
The transfer of property in Germany is subject to a transfer tax (Grunderwerbsteuer). The percentage varies between the German states – ranging between 3.5% (Bavaria, Saxony) and 6.5% (Schleswig-Holstein). In Berlin, it is currently 6% of the purchase price as it is in Frankfurt (Hessen). There are exemptions, mostly for the transfer of property within the family.
Inheritances and gifting are subject to the same tax rates. The tax rates differ depending on the closeness of the family relationship between the heir and the deceased/donor and the amount transferred. For this purpose, the law distinguishes between 3 classes of relation:
Class 1 Spouse, children, grandchildren, parents and grandparents (ie, direct line relatives) Class 2 Siblings, nieces and nephews Class 3 Non-related
German property is subject to a real estate tax (Grundsteuer), levied annually. The tax base is the ‘assessed value’ (Einheitswert). The tax depends on several factors, including location, size and use. It also depends on the German State (Bundesland) in which the property is located. The owner pays it directly to the tax authority but, under most rental contracts, it can be recovered from the tenant. Typically, for a 1-bedroom apartment in Berlin, the tax will be around €150-250 per year which is comparatively low, compared to other countries.
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Michael Totman Director International Sales Advisory office ACCENTRO Berlin Phone: +49 (0)30 / 887 181-41 E-Mail: email@example.com
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