In recent years, the housing cooperative has often become the focus of interest of entrepreneurs as a legal form, with which one can save both corporate tax and business tax. On the one hand, the reference to the tax exemption in the Corporate Tax Act is that housing cooperatives are exempt from corporate tax. On the other hand, even in the case of a housing cooperative, the extended land reduction of the Trade Tax Act applies. However, in order to obtain these tax exemptions, a housing cooperative must comply with very strict conditions. In the case of corporation tax, the exemption exists only if ordinary members of the housing cooperative receive a subsidy from it. Thus, investing members, who are often the actual tenants of a housing cooperative, are an exclusion criterion. And in the case of exemption from trade tax, only rental income may count as income of the housing cooperative.

As expected, an article on the tax benefits of a housing cooperative should first explain what this legal form is. We also do this once we have set out the general principles of a cooperative society. Because a housing cooperative is in its essence only a special form of cooperative.

SEGMENT002 1.1. The nature of a cooperative

Cooperatives are a legal form that stands alongside the classic partnerships and corporations on the one hand and the registered associations on the other. They combine elements of both groups within themselves. Thus, the legal relationship of the cooperative members to each other may be more comparable with the position of association members. That is why the cooperative is also referred to as a member. Because the cooperative members unite the common goal of mutual promotion. This is different in a society. After all, a society primarily strives for external success. But when it comes to taxation, the cooperative is subject to the same rules as a corporation.

1.2. The nature of a housing cooperative

At the Housing Cooperative, we now have a cooperative whose members specifically seek to promote housing and the provision of housing. The solidarity aspect is at the forefront. This was already the case with the first housing cooperatives, which emerged in the 19th century as an alternative to the purely economic actors in the cities of Germany, which grew rapidly due to industrialization. Even today, housing cooperatives compete as a social-solidarity project with the other real estate companies and private investors in the real estate business.

Therefore, members of housing cooperatives are entitled to an adequate housing. Incidentally, this right cannot be revoked unless exceptional reasons restrict it. It is even hereditary. In addition, the member pays a rent in return. If the housing cooperative accepts a new member, then the acquisition of a share in it is planned. This share can basically be compared with the position of a deposit in an otherwise usual tenancy. Also in most other contexts, the tenancy law applies to members of the housing cooperative. However, there are also restrictions that strengthen the rights of members in relation to their housing cooperative. For example, there is the right that rent increases apply to all members to the same extent.

2. legal bases for the housing cooperative

Basically, we would like to deal only briefly with the actual legal connections to which the housing cooperative is subordinated. Rather, the focus here should be on the legal norms that are connected with the taxation of the housing cooperative.

2.1. The Cooperative Act and the Statutes of the Wohnungsbaugenossenschaft

Like all other cooperatives, the housing cooperative follows the guidelines of the Cooperative Act (GenG). For example, the prerequisite for founding must be adhered to, which is only possible by at least three people. These persons may be both natural and legal persons. In addition, the statutes of the Wohnungsbaugenossenschaft are of decisive legal importance. The objective of the housing cooperative, the promotion of its members in the provision of housing, is enshrined in its statutes.

2.2. Corporate Income Tax Act as a provision for income taxation of Wohnungsbaugenossenschaft

Also in the case of taxation, the housing cooperative follows the other cooperatives. The Corporate Tax Act applies to them. However, it states in § 5 (1) no. 10 KStG that a housing cooperative is in principle exempt from corporate tax. However, there are certain framework conditions that a housing cooperative must meet in order to obtain the tax exemption. We will go into this in detail later.

2.3. Trade tax law also applies to housing cooperatives

And since the housing cooperative is subject to corporate tax like a commercial company, it is also affected in principle by trade tax. Therefore, the legal standards of the Trade Tax Act apply to them. In this context, it is interesting to know whether it also makes it possible to exempt them from taxation. We will also discuss these in the future.

So now we go into the first of the two most pressing questions underlying our article. Because the principle exemption of the housing cooperative from corporate tax is only possible under certain conditions. On the one hand, the exemption is conditional on the housing cooperative receiving a maximum of 10 % of its revenue from other economic activities unrelated to the real estate business.

3.2. Derogation for power generation and power supply

A further 10% of such revenue, which is actually considered an exclusion criterion, is allowed if it is related to the supply or production and recovery of electricity. However, restrictions apply here too. In this case, the electricity must come from plants that are entitled to pay a tenant electricity surcharge pursuant to § 21 (3) of the Renewable Energy Sources Act.

3.3 Exclusion criterion investing members

3.3.1. What is an investing member of a housing cooperative?

The most important criterion for obtaining the tax exemption from corporation tax, however, is that only ordinary members of the cooperative may benefit from the support of the housing cooperative (§ 5 (1) no. 10 sentence 5 KStG). So what is meant by the exclusion of the investing members mentioned in the Corporate Tax Act? For this we take a look at § 8 paragraph 2 GenG. Because it basically defines the distinction between a regular and an investing member of a cooperative. Thus, the cooperative has the right to include purely investing members who lack the rights a regular member is entitled to. In particular with regard to voting rights at the general meeting, investing members are restricted or even excluded. Even when amending the statutes, investing members remain without influence.

Therefore, if a housing cooperative wants to generate rental income by taking in additional members, they usually represent investing members within the meaning of § 8 GenG. However, this also excludes the exemption of the Wohnungsbaugenossenschaft from corporate tax.

Although it is possible to include a new member as a tenant in the housing cooperative in such a way that it is considered a full member. But this is usually outside the interest of the other members, because this inclusion weakens their own voting rights.

3.3.2. note on the legal situation regarding § 5 (1) no. 10 sentence 5 KStG

The legal norm that makes the exclusion of investing members a condition of the corporate tax exemption of housing cooperatives has been part of the law since 2019. Although it has only recently found its way into the corporate tax law, it has a broader meaning. For example, the legislator explicitly pointed out in the explanatory statement that this passage is only of an explanatory nature. It is therefore not a new regulation but a clarification. Consequently, this exclusion criterion has always existed.

The second question concerns the exemption of the housing cooperative from trade tax, i.e. the so-called extended land reduction. Here, as for all other companies, in principle commercial companies, the provision applies that an exemption is possible if it exclusively concerns the holding and management of real estate. However, if it also pursues other economic objectives, or if it has a commercial character, the exemption is excluded. However, the housing cooperative receives the exemption only on request from the tax administration.

5th Critical Analysis on the Tax Exemption of the Housing Cooperative

So, as we can see, for a housing cooperative there is definitely the possibility of exemption from corporate tax and business tax. If we ignore the conditions, this is indeed a particular advantage. Finally, this leads to a complete tax exemption of the housing cooperative. In the recent past, this has of course found a corresponding echo among entrepreneurs.

But it also requires a closer look at the conditions in order to assess whether the housing cooperative is actually a tax savings model of the first kind. In particular, the condition relating to the inclusion of purely investing members in the housing cooperative bursts the sweet dream of corporate tax exemption. It is true that the limitation of income to rental and leasing also plays a role in the tax exemption. However, this criterion is less relevant in most cases due to the principal economic activity of the housing cooperative.

In the case of the extended land shortening, the tax advantage is basically not a special prerogative of a housing cooperative. Finally, other companies can also benefit from this tax exemption. Therefore, the analysis of the housing cooperative’s tax advantage is only aimed at the possibility of corporate tax exemption.

Since the corporate tax exemption of a housing cooperative depends to a large extent on the exclusion of investing cooperative members, but this is usually part of the core business of a housing cooperative, the answer to the question of whether such a legal form offers special tax advantages is a clear no. Only if at least this criterion is met can the housing cooperative be regarded as a tax saving model. But then their advantage is actually enormous.

6th conclusion from the analysis on the housing cooperative

So anyone who plays with the idea of following the hype of the housing cooperative should therefore collect extensive information in advance. Detailed advice from a tax consultant experienced in real estate tax law helps to avoid expected surprises through tax assessment. There are other interesting alternatives to the housing cooperative, such as Immobilien-GmbH or Immobilien-GmbH & Co. KG. These also offer various advantages that should be considered. However, if you actually want to use the housing cooperative as a design model, then you should also seek tax advice. After all, you also want to be sure that the tax office accepts your right to tax exemption.