In times of low interest rates on the capital market, real estate appears as a form of investment that is both profitable and stable in value. One way to invest in real estate is to start a real estate company. Taxation of real estate in company assets is also the focus of many entrepreneurial considerations in such a case. Differences must be considered, depending on whether the company is a partnership or a capital company. Accordingly, professional advice in advance of such a decision is important.

In the video we show you the advantages & disadvantages that a real estate acquisition as a real estate GmbH offers: trade tax, corporate tax, depreciation.

1st introduction

In today’s low-interest phase, investing in real estate can be a profitable and value-saving alternative to pure capital investment. The steady fall in interest rates makes financing real estate an attractive and long-term investment opportunity. [1] In order to be able to make a decision for a tax-optimal form of investment, extensive knowledge of the tax burden is required, since this can vary greatly depending on the legal form.

In the Federal Republic of Germany, real estate assets, except for property tax, are not subject to independent taxation. Thus, it is all the more important to compare the respective legal forms in relation to the different tax types.

Against this background, this article is intended to give an overview of some design options for minimizing the tax burden and optimizing the return, while at the same time providing a decision support for investing in one of the legal forms presented.

The information available relates exclusively to indirect real estate investment in the form of capital and partnerships. Furthermore, it is considered that the companies are pure real estate companies.

All statements, especially in the area of inheritance tax, are based on the currently valid legal situation.

This article is divided into two main chapters resulting from the aforementioned legal forms. These parts examine the types of tax affecting the company and present their impact on the company and its shareholders.

Finally, the main results of the work are summarized in the conclusion and the resulting recommendation for action is presented.

2. real estate in the assets of a corporation

2.1. Corporate tax

If real estate assets are located in a corporation which has its registered office or place of management in the Federal Republic of Germany, the company is subject to unlimited corporate tax pursuant to § 1 KStG. The income generated is based on § 8 Abs. § 15 EStG is generally treated as income from commercial operations. Under certain conditions, this constellation can be advantageous. This will be discussed again at a later date.

In the following, a tax-optimized design model will be presented on the basis of a paid transfer of assets to a family corporation. In the initial situation, the property is in the civil-law private assets of the parents and should be transferred to the children as part of the succession planning. By establishing a corporation, the object is to be held in a legal form that minimizes the tax expense and at the same time creates liquidity. [] 2]

In this model, the company acquires the property from the assets of the parents. At best, the expiry of the ten-year holding period and the associated tax exemption in accordance with § 22 No. 2 EStG i.V.m. § 23 para. 1 S.1 no. 1 EStG on the part of the seller no taxation. [3] Furthermore, the inflow of liquidity from the sale and the associated lack of inflow of rental income should continue to provide livelihood.

The agreed and paid purchase price is in accordance with § 6 para. 1 S.1 No.1 EStG is accounted for according to the cost principle in the profit determination of the corporation. This results in a new volume of depreciation, which reduces the company’s taxable income, but has no influence on liquidity. The interest on the borrowings of any bank loan used to finance the purchase can also be deducted as operating expenses.

Due to the extended reduction in business tax law, which is discussed in the following chapter, the tax burden at the company level is limited according to § 23 para. 1 KStG plus the solidarity surcharge to about 15.83%. [4]

In the case of distribution of profit after tax to the shareholders of the corporation, fall due to § 32d para. 1 S. 1 EStG again 25% withholding tax plus solidarity surcharge and, if applicable, church tax. Thus, the total tax burden at the shareholder level is a maximum of 28.63%. Alternatively, it is possible to opt for the Parts Income Procedure after application if the requirements of § 32d para 2 no. 3 EStG are fulfilled. If the shareholder holds at least 25% or at least 1% of the shares in the corporation and works for them, only 60% of the dividends within the framework of the income from capital assets are subject to income tax, since according to § 3 no. 40 d EStG 40% are tax-exempt. The advertising costs incurred in connection with these revenues may be due to § 3c Abs. 2 S.1 EStG can be deducted analogously in the determination of income to 60%. In the case of the withholding tax, an advertising deduction according to § 20 Abs. 9 p.1 EStG. The abovementioned application binds the taxable person for the tax year applied for and the following four.

As already mentioned at the beginning of the chapter, this constellation can be advantageous in terms of tax burden. In the case of the accumulation of profit, the low tax burden at the company level and the newly created depreciation volume can result in a quick return of the agreed purchase price or generate liquidity for new investments.

In the case of full distribution, however, the tax burden when applying the withholding tax and possible church tax liability is approx. 39.92%.[5] This can have an adverse effect, depending on the amount of income in the case of an investment through a partnership, and the associated individual tax rate of the taxpayer. This shows in the approach the importance of the choice of legal form. Before making a decision, the investor should be aware of these possibilities.

The change of entity also triggers a real estate transfer tax process and thus a tax burden. This topic is explained in further detail in another chapter.

2.2. Business tax

In the context of trade tax reductions, the business income from the real estate in the business assets can be reduced in order to avoid double taxation with trade tax and real estate tax according to § 9 No. 1 S. 1 GewStG in accordance with § 121a BewG, lump sum by 1.2% of the unit value determined by the tax administration (140%).

Instead of the reduction of sentence 1, the application of the option of the extended reduction pursuant to § 9 No. 1 S. 2 GewStG makes it possible to obtain the complete exemption from business tax. A prerequisite for the beneficiary is that the company submits an application and exclusively uses and manages its own property. That request shall be resubmitted each year. However, it is not bound by time, so that it can be made ex post until the formal validity of the business tax ruling or until the reservation of the inspection is lifted. [] 6]

The requirement of exclusivity to apply this standard suggests that transactions outside the beneficiary activities jeopardise the use of the extended reduction. In addition to acting as a pure real estate company, e.g. the management of capital assets and the care of housing are allowed, but these incomes are not subject to the privilege of extended reduction. On the other hand, an act harmful to the beneficiary entails the extension to all income of the company and the abolition of the reduction. [7]

In addition to the criterion of exclusivity, the criterion of use and management of own property is also of essential importance. The activity of the limited liability company must not exceed that of asset management, since, for example, if the border with the commercial real estate trade is crossed, a trade tax advantage no longer exists.

As a legal consequence of this right of choice, the business income attributable to the aforementioned activity may be reduced by this amount. Similar to mere asset management, a real estate company thus does not incur any business tax burden. The possibility of extended reduction is a cross-legislative standard. [] 8]

Unlike the flat-rate reduction according to sentence 1, the property does not have to belong to the operating assets at the beginning of the calendar year for the use of the extended reduction. [9] However, companies that only hold one object in their assets may have a problem. In the case of the sale of this property, the beneficiary condition of exclusivity no longer exists. The sale would be burdened with business tax due to the classification as commercial income of the corporation. To avoid this, the transaction should be completed on 31.12. at 24:00. According to BFH jurisprudence, this constellation exceptionally does not violate the criterion of exclusivity. [10] In order not to jeopardize the existence of the conditions, a new one should be purchased before selling the object.

If shares in corporations are transferred to the next generation as part of the donation or succession, these belong to the beneficiary assets according to 13b para. 1 Nr.3 ErbStG, insofar as the participation in the nominal capital is more than 25%. With a real estate company, however, the problem arises that the management asset ratio is 100%. For the application of the control protection, however, this must not exceed 50%. Thus, the share does not fall under the beneficiary property and, after deduction of the personal allowance, is subject to inheritance tax.

It follows from this that in the case of non-asset management companies it is possible to invest private assets in the company and transfer them to the heirs as beneficiary assets after two years. This period results from § 13b Abs. 2 S.3 ErbStG, by defining the young administrative assets.

Regardless, parents should start early to transfer assets to the children. With an optimal distribution, assets of 1.6 million euros can be transferred to the children every ten years in a family of four. [] 11]

If a property is transferred to the children as part of the anticipated succession, the rental income usually flows to them. In order to be able to continue to support the parents in the next few years, it is possible to initially transfer only the civil ownership of the property to the children, subject to a reserved usufruct. This means that the income can still be attributed to the parents. The usufruct constitutes in accordance with § 10 para. 5 No. 2 ErbStG constitutes an estate liability and thereby reduces the basis of assessment for calculating the inheritance tax. This results from the multiplication of the annual value, which usually results from the average rental income and a multiplier of the remaining life expectancy of the beneficiary. This can be taken from the published data on the statistical lifetime of the Federal Statistical Office. [] 12]

2.4 Real estate transfer tax

In the case of a paid purchase of real estate by a corporation, according to § 1 para. 1 no. 1 GrEStG presents a change of legal entity that triggers a real estate transfer tax-payer transaction. The tax base for determining the real estate transfer tax is derived from § 9 GrEStG. The agreed purchase price will be charged, depending on the country, with an individual tax rate, which since 01.09.2006 according to Art. 105 par. 2a S. 2 GG can be determined by the federal states themselves and is currently between 3.5% and 6.5%. The rates are given in the table attached. Various design possibilities are available to avoid this control load. A model will be presented below.

If a property is in the civil property of two taxpayers, the property may be in accordance with § 5 para. 1 GrEStG without triggering real estate transfer tax can be transferred to a collective holding in the form of a partnership. After the transfer, the shares in the company must correspond to the previously existing civil-law participation relationships, otherwise tax neutrality cannot be achieved.

The application of the conversion tax law makes it possible to convert the current structure into a corporate tax entity by changing its legal form. According to § 25 UmwStG i.V.m. §§ 20 – 23 UmwStG, the change to book values can be made, so that the discovery of the hidden reserves is avoided. [13] The prerequisite for this is that between the contribution of the property to the newly formed partnership and the change of legal form to a capital company, according to § 22 para. 2 S. 1 UmwStG, must be at least seven years. If the change is carried out beforehand, the hidden reserves are revealed and a profit is generated.

In addition to the term in conversion tax law, the real estate transfer tax according to § 5 para. 3 GrEStG for at least five years, otherwise the tax-free transfer to the partnership will be reversed.

Thus, there are also design possibilities that make it possible to avoid the application of the different tax rates of the countries to the often very high purchase prices for real estate and the associated tax base. However, the disadvantage of these models is that they should be carried out early, as the tax exemption is linked to fulfillment periods.

In the area of income tax design, § 6b EStG offers the possibility to prevent profits from the discovery of hidden reserves at least for a certain period of time. [14] The annual scheduled depreciation reduces the acquisition or production costs of a property. Any increases in the value of the object are usually not recorded in the profit determination. Thus, these are only realized during a sale or operational task. The amount exceeding the proceeds of the sale and the book value is normally subject to current taxation, which leads to a profit in the year of the sale that often significantly exceeds the constant annual surplus or profits of previous years. The tax burden on capital gains would have a negative impact on liquidity and would make it difficult or impossible to invest in a new object or new objects.

By applying § 6b EStG, this effect is to be counteracted by avoiding the taxation of hidden reserves. For this purpose, a reserve is transferred to a reinvestment good in the year of sale or formed for a future investment. This reserve can be created up to the amount of the profit made. The new investment must take place within four years and can be extended for a further two years for newly constructed buildings. [15] In the case of reinvestment, the acquisition or production costs are reduced by the amount of the reserve created, so that the current depreciation takes place from a reduced basis of assessment. By acquiring a substitute object, a tax deferral can thus be effected for the taxpayer.

The prerequisite for this is that the property has been part of the fixed assets of a domestic permanent establishment for at least six years at the time of the sale and that the taxation of the Federal Republic of Germany with regard to the new investment is not restricted. [] 16]

Furthermore, for the application of this provision, the profit according to § 4 para. 1 EStG, § 5 EStG or according to § 6c EStG i.V.m. § 4 para. 3 EStG can be determined. Thus, the standard applies to sole proprietorships, commercial partnerships and corporations.[17] In the case of an asset management partnership, the principle of transparency allows the property to be sold tax-free after the ten-year holding period. If this is sold beforehand, a private divestment business is created on the basis of § 22 No. 2 EStG i.V.m. § 23 para. 1 S.1 No 1 EStG.

3.2. Trade tax

As already explained in chapter 1.2, the extended reduction is a cross-legal standard. If the conditions for application are not met, it is possible to set up an asset management partnership which is not subject to trade tax due to its legal form. [18] The income is determined separately by the tax administration and subjected to income tax at the level of the shareholders as income from renting and leasing.

3.3. inheritance tax

For third-party rented properties, there are only small tax benefits, since these are subject to 90% of the inheritance tax according to § 13c para 1 ErbStG. The personal allowances according to § 16 Abs. 1 no. 2 ErbStG in the case of an inheritance or donation is not sufficient to avoid inheritance tax. The relevant values for determining the taxable acquisition are determined in the case of rented residential properties with the income value method according to §§ 184 ff. BewG is determined.

If a taxpayer owns real estate assets that are transferred to the heirs at the death of the deceased, some design options are available. In the following, a model will be presented using an example.

As shown in Figure 1, a third-party property is in the civil property of the parents. As part of the early succession planning, the next generation is to be involved in the assets at an early stage by establishing an asset management partnership, e.g. in the form of a GbR.

First of all, the parents sell the property to the GbR, in which the children are involved in addition to them. The resulting purchase price demand can then be serviced from the annual rental income over a certain period of time. Thus, parents continue to receive a fixed income, and the payment of the purchase price creates new depreciation volume, which has a positive effect on liquidity.

By drawing up a social contract, important key points such as the shareholder contribution and management can be defined. Business can still be conducted by the parents, as the shares do not have to correspond to the voting rights in the company. In addition, the deposit can be made with small amounts, since this type of company does not require a minimum deposit. [19] However, it should be noted that in the case of transfer of company shares to minors, e.g. a supplementary caregiver must be appointed. Since legal transactions cannot yet be concluded due to the lack of legal capacity, except for a legal advantage, a guardianship court approval according to § 1909 BGB must be obtained.

In the event of the death of the decedents, the tax exemptions pursuant to §§ 13a i.V.m. 13b ErbStG cannot be applied, since it is a partnership managing assets that does not generate commercial income. [20] However, the allowances according to Table 1 can be applied to several children, and a transfer of up to 400,000 € within ten years is tax-free. Thus, with early succession planning, several intervals can be used to transfer assets to the children during their lifetime.

Income taxation offers the advantage that due to possibly low income of the children, progression advantages over the basic allowance can be exploited. A provision in the articles of association regarding the restriction of withdrawals to the tax burden incurred by the shareholders makes it possible to restructure the remaining surpluses and thus to generate further capital for new investment. The heirs can participate in this from the beginning, so that there may be no taxable acquisition when the deceased dies.

3.4. Property transfer tax

In the example shown above, a pro rata property transfer tax is due on transfer of the property to a total hand in accordance with § 5 GrEStG. In this respect, there is no tax burden on the share of the parents. If the participants each hold shares in the family GbR in the amount of 25%, real estate transfer tax in the amount of 50% is incurred for the shares of the children.[21]

If you now change the initial situation of this constellation, it is possible to transfer the property to the next generation without real estate transfer tax. If the property is transferred from the civil property of the parents to the children, to avoid a double burden with inheritance tax, the § 3 no. 2 GrEStG. This rules that in the case of an acquisition by inheritance or donation among living persons, the transaction is exempt from taxation.

This standard can lead to a double exemption being achieved. As already shown, with an optimal division in a family of four, a wealth of 1.6 million euros can be transferred tax-free within ten years. If the value of the property is within the allowances applicable to a transfer from parent to child, there is no inheritance tax. For the application of § 3 no. 2 GrEStG, it is sufficient that the acquisition of the land as a tax operation is subject to inheritance tax. For this purpose, an actual tax burden does not necessarily have to arise. [] 22]

In the case of a paid acquisition by a person who is related to the seller in a straight line, according to § 3 no. 6 GrEStG there is also no burden with real estate transfer tax.

The property is now in the civil property of the children and they have the opportunity to establish a partnership. By contribution to the total assets of the company, the land in accordance with § 5 Abs. 1 GrEStG real estate transfer tax free, provided that the shareholding relationships in the company correspond to the previous ones. If the share of the shareholder changes within five years of the transfer, however, property transfer tax is retroactively incurred. The disadvantage of this structure is that the parents can no longer earn further income from the property and are therefore dependent on other sources of income.

4th Conclusion

As already mentioned in the introduction, the choice of legal form with regard to the tax burden is an important criterion. Thus, the taxpayer should have already dealt intensively with the various possibilities before the investment.

Acquisition of a property through a corporation has the advantage that rental income at the company level is burdened with a low tax rate by the extended reduction under business tax. If the intention of the taxpayer is to generate assets through the acquisition of real estate and other sources are available for subsistence, this legal form offers an attractive opportunity.

In the case of full distribution, the tax rate advantage is almost marginal compared to the partnership due to the tax creation at the company and shareholder level.

The investment through a partnership can be advantageous when investing far from the top tax rate, since a lower rate is applied by applying the basic allowance and the progression compared to the corporation. In addition to the advantages of current taxation, the divestment issue is also of important importance. Unlike a corporation, the property can be sold tax-free in an asset management partnership after the ten-year holding period has expired due to the transparency principle. Furthermore, the possibility of a transfer from private assets to a partnership without real estate transfer tax is also an important criterion for a decision.

Thus, it can be concluded that the investment in a property entails an individual choice of legal form. The taxpayer should be aware of his tax interests in advance and include them in the decision-making process.