Avoiding trade tax

Investors wanting to take advantage of tax benefits in connection with the acquisition of real estate need to take into account three different phases: the acquisition phase, the management phase and the exit. In the acquisition phase, the decisive roles are played mainly by real estate transfer tax (RETT) and the acquisition structure, while in the management phase the goal is to avoid an unnecessary trade tax burden. In an exit it is important to avoid a taxation of the gain on disposal where possible (see articles Optimised taxation of real estate investments in Trinavis Real Estate Letter No. 1/2015 and Optimised taxation of exiting real estate investments in Trinavis Real Estate Letter No. 2/2014).

In principle, there are two major alternatives to avoid trade tax:

Optimised acquisition structure in terms of trade tax

The first is to hold the real property as private property, i.e. property owning companies hold the property in an asset management partnership without trading activities. This might be a good option if the partners of the asset management partnership are liable for trade tax in principle but do not maintain a permanent establishment in Germany as they are based abroad. If the day-to-day business is run at the level of the property owning partnership, these shareholders may easily avoid a permanent establishment in Germany (which would render them liable to trade tax).

Extended trade tax exemption

The second alternative is to apply the so-called extended trade tax exemption (erweiterte Kürzung). This enables entities liable for trade tax due to their legal form (such as corporations) to reduce their trade income by the collected rental income when they exclusively manage their own property. The exclusivity principle, as it is known, is however associated with strict requirements in terms of timing and conditions. To be able to make use of the extended trade tax exemption, the company might have to transfer detrimental trade fixtures (not part of the real property from a tax perspective) to a third party under certain circumstances. Furthermore, the exclusive management of the property has to last throughout the assessment year, which may necessitate a corresponding structure (such as accretion etc.) in the event of a sale.

Trade tax privilege for housing companies

Housing companies are often organised in a legal form which is liable to trade tax per se (Wohnungsgesellschaft). Nevertheless, they are entitled to make use of a trade tax exemption privilege, as property holding companies managing their own assets shall not be subject to trade tax irrespective of their legal form. If the housing company exclusively rents out own appartments or realises besides only capital income, the rental income from the appartments may be deducted from the trade income. If, however, the housing company performs other activities – even if only to a limited extent – also the rental income will be subject to trade tax (see article Gewerbesteuerprivileg für die Wohnungswirtschaft trotz Erbringung von Energiedienstleistungen?, FWW 1/2017).