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Legal framework and Tax bases for cross-border real estate investments.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments.

Legal Framework.

The purchase of real estate in Germany must comply with German laws. The purchase contract must be notarised in Germany. The registration of the acquirer in the land register is mandatory for the acquisition of a property. Land registries in Germany are natural persons as well as legal and partially legal entities (GbR, KG, GmbH, AG). Companies incorporated under foreign law may also acquire real estate in Germany and be entered in the land register as the owner.

The brokers and builders regulations (MaBV) should ensure the comprehensive protection of the acquirer in the developer contract or brokerage contract. The brokers and builders regulation (MaBV) regulates the protection of the acquirer in the developer contract, also the question of when the developer may accept money from the acquirer and in what way the developer must secure the money received by the acquirer. The payments are related to completed construction phases and Is legally required by the German Federal Government.
If certain construction phases are completed, the developer can claim up to seven installments, according to the broker and developer contract. The following list shows the twelve legally required construction phases will be summarized by the developer to meet the requirements of seven installments.

The rates can be composed of the following percentages:
1. 30% of the contract amount for the transfer of ownership of a property
2. Of the remaining contract amount
40 % after completion of the masonry work and works on the roof.
8 % for the installation of the roofs and gutters.
3 % each for the raw installation of heating, sanitary facilities and electrical systems 10 % for the installation of the windows, including the glazing.
6 % for interior plaster.
3 % for the screed works.
12 % after the house is ready for occupancy.
3 % for the facade works.
5 % after complete completion of the house.

a) No country-related restrictions.

Full ownership is the most complete and comprehensive right over real estate in Germany. Ownership of the property includes ownership of all constituent parts of the property (notwendige Bestandteile), including all buildings located there and everything above and beneath the surface of the land (unless the rights have been granted to a third party). Ownership is registered in the land register and that is proof of ownership to everyone with a legitimate interest.
Unlike many other countries, Germany does not generally impose limitations on foreign real estate investments. There is also no difference between ownership by a natural person and a legal entity, simplifying investments from foreign states and jurisdictions.

b) Ways of purchasing property.

In Germany there are in principle two ways of acquiring property. Either the property can be acquired directly (asset deal) or the legal entity owning the property is purchased, accompanied by a transfer of the ownership (share deal). In order to be valid, agreements for the transfer of property must generally be in the form of a notarial deed. The deed must cover all relevant aspects of the acquisition. Any kind of side letter or agreement that amends the contents of the notarial deed either orally or in writing may result in the purchase agreement being invalid. Additionally, every property in Germany is recorded in the land register. To complete the transfer of ownership, the new owner must be registered in the relevant land register. The change of ownership is effective from the date of registration.

c) Permits.

A public permit may be required prior to a transfer of property. The permit is usually requested by the notary. The notary also applies for the waiver of the local authority’s pre-emptive right (also referred to above) and the tax clearance certificate. The latter is issued by the tax authorities after the payment of any Property Transfer Tax (RETT) which may be payable on the transfer.
It is then common practice to authorize the notary who notarized the transaction to make all necessary (public) applications and declarations in order to effect the transfer of the property. Notaries are entitled to be paid pursuant to a legally binding fee order. The law prohibits any agreement on lower notarial fees; however, fees are capped at a transaction value of €60 million. Notaries are regularly investigated to ensure that the fee order is observed. The declaration of transfer of ownership itself must be contained in a notarial deed issued by a public German notary. Transaction costs for the transfer of property to cover registration fees, notarization, etc. can be estimated at 1.5 percent of the purchase price. Property Transfer Tax currently varies between 3.5 percent to 4.5 percent, depending on the German Federal State. This excludes costs for due diligence and the involvement of lawyers and technical experts. There are ways to avoid Property Transfer Tax.

Processing fees.

Who pays the brokerage commission in Germany?

The broker is usually hired by the seller to offer the property and to find a suitable buyer. But that does not necessarily mean that the seller bears the costs. Rather, it is often even the other way round. Either the seller or buyer bears the brokerage alone or both share the costs. „The commission of the seller is referred to in the industry as internal commission, the buyer‘s as external commission,“ said Heiko Senebald of the German Real Estate Association (IVD), the Federal Association of real estate consultants, brokers, administrators and experts. Basically, the question of who pays the commission depends on local customs and usually also on the attractiveness of the property. There is no legal regulation. Especially in southern and western Germany, it is common for buyers and sellers to share the commission. In the north and east, on the other hand, there is often the model of the paying buyer. But there are situations in which other arrangements are made than usual in the region. Sellers are more willing to pay the brokerage fee when a house is difficult to sell because of its location and condition. Conversely, buyers of prime properties or properties in a desirable location are welcome to pay the full commission. In Berlin, for example, a buyer‘s commission is regularly agreed.

Tax bases for cross-border real estate investments.

a) Property Transfer Tax / Other Acquisition Costs. 3.5% - 4.5%

In Germany, the acquisition of property is subject of the real estate transfer tax. The real estate transfer tax is based on the value of the consideration, basically on the purchase price. The tax rate in most federal states is 3.5% of the tax base; the states of Berlin, Hamburg and Saxony-Anhalt have raised the tax rate to 4.5%. Insofar as the property of a partnership or corporation includes domestic real estate, direct and indirect transfers of at least 95% of the shares and, subject to certain conditions, the merger of at least 95% of the shares in the hands of a purchaser are subject to the transfer tax. In addition to the real estate transfer tax, there are still costs for the notary public in Germany and costs for the land registry in the amount of approx. 1.5 to 2% of the purchase price. If a broker has been commissioned, then there are additional costs.

b) Value Added Tax (VAT) 19%

The sale of a property in Germany is generally Exempt from VAT! The rental and leasing of real estate is VAT Exempt! An option to value added tax is permissible if the tenant is an entrepreneur and provides almost exclusively VAT-liable services. If for example the object is already let to tenants and the purchaser continues these tenancies after the acquisition, the sale might have to be qualified as a so called transfer of a business or of a separable part of a business as a whole, which as a rule is not subject to VAT. However, depending on the individual circumstances of the case the sale might also be a VATable, but VAT-exempt delivery. Here again the question would be, whether the seller is able to opt for VAT in order to avoid any corrections of input VAT deducted in the past. For the purchaser such an option might lead to the so called reverse charge system meaning that he has to fulfil certain conditions in the future in order to avoid an input VAT burden on the purchase price. Because of the fact, that the distinction between business transfer and delivery is usually not that clear-cut, both possibilities have to be taken care of within the necessary tax clauses in the purchase agreement.

c) Real Estate Companies.

In the event of a sale, in order to have the choice between the sale of the real estate and the sale of the shares of the company holding the real estate, many investors acquire real estate through a corporation (real estate firm) or partnership.

d) Income Tax (salary tax).

Natural persons who are owners of their privately used property, without income from renting and leasing are Not subject to the extent German income tax!

e) Land Tax. 3.5%

The building land and its development is subject to property tax in Germany. Land tax is levied by the municipalities and cities. The amount of the property tax is based on the unit value of the property, which is regularly below the market value. The applied rate of levy is different from community to community. However, should the owner rent out the property to tenants than he is fully entitled to declare the property tax as expenses and to pass it on to the tenants.

f) Sale of Real Estate.

Limited taxable income also includes gains on the sale of domestic real estate that is owned by the seller and is sold within a period of ten years after the conclusion of the notarised deed of sale! The same applies to the sale of shares in a property-managing partnership!

Attention: In Germany, capital gain remains tax-free if the property or shares are sold after ten years of ownership. If the property was not used personally by the owner, it must be 10 years in the possession of the owner to avoid speculative tax!