date | theme

03. May 2019 | Immobilien-GmbH: Advantages of renting land

05. July 2019 | Founding a real estate company & children participating in real estate

10. July 2019 | Selling real estate to children: Saving income and inheritance tax

10. December 2021 | Taxation of commercial real estate – 3 tax advantages (this contribution)

When taxing commercial real estate, you can take advantage of three outstanding tax advantages. On the one hand, the sales tax, which was incurred during the construction of the property, can be refunded as input tax by the Treasury. This alone brings a tax advantage of 19%. However, the condition is that the rental takes place to traders who are also entitled to deduct input tax. Furthermore, the rate of depreciation for the lease of commercial real estate can be set at 3% instead of 2%. Even if the tax base is lower due to the refunded input tax, this is nevertheless a tax advantage. And thirdly, you can save trade tax when using a real estate GmbH when taxing commercial real estate. For this purpose, the extended land shortening is used, so that the GmbH only has to pay 15 % of corporate tax.

If you are interested in investing in real estate, then in principle you have the choice whether to rent the real estate for residential purposes or to entrepreneurs. If we assume that the investment includes the construction of a corresponding rental property, this is of course also relevant for sales tax. Apart from this, one should also make a whole series of other tax considerations, which go hand in hand with the optimized taxation of commercial real estate. What kind of thoughts could be in the foreground, we want to illuminate in this article.

Let’s start at the very beginning. This means the construction of the commercial property. As already mentioned, there is sales tax. Sales tax is paid both when constructing a residential building and a purely commercially used building. As everyone knows, the tax rate is 19% of the supplies and other services required for construction.

However, there is generally the possibility for entrepreneurs to get the sales tax refunded as input tax. However, this is a bit complex when renting real estate. Because the rental of real estate is basically tax-free according to § 4 no. 12 UStG. But there are exceptions. If an entrepreneur rents a property to another entrepreneur entitled to VAT, then he can opt to calculate the rental with sales tax (§ 9 UStG). Of course, the commercial tenant can then in turn reclaim the sales tax on the rent as input tax from the Treasury. Therefore, this does not constitute a financial disadvantage for a commercial tenant.

But what does the landlord get from the fact that he now also has to take care of the sales tax when renting? Finally, this also entails the obligation to submit corresponding VAT declarations and VAT returns.

The point is that the landlord himself is also entitled to deduction by providing a service that is now relevant for VAT purposes. Thus, when taxing commercial real estate, the landlord can get the sales tax paid during construction refunded as input tax. After all, this is a 19% tax advantage compared with the rental of residential buildings, for which VAT cannot be drawn.

Also in the second tax advantage, which we would like to highlight with regard to the taxation of commercial real estate, there is a difference between renting apartments and commercial premises. Specifically, this is about the statutory depreciation rate, with which you can write off these properties annually. For a rental property with apartments, the depreciation rate is normally 2 % annually. Commercial real estate, on the other hand, can be depreciated at an annual rate of 3 % in accordance with § 7 (4) sentence 1 no. 1 EStG.

Even if you lose the sales tax on commercial rental when calculating the basis of depreciation by the input tax, a tax advantage still remains. The calculation from 2 % to 119 % versus 3 % to 100 % is always an inequality in favour of the higher depreciation rate (with a constant ratio of 2,38 to 3).

So far, we have resorted to measures in the taxation of commercial real estate that lead to a tax advantage rather indirectly. With our third approach, however, we want to avoid a separate tax altogether. This is about trade tax. But before we reveal the details, we have to go into an initial requirement that we have been able to ignore so far.

If you are considering renting commercial real estate, then this is the most advantageous for tax purposes with a Immobilien-GmbH. This is partly due to the fact that we can save trade tax with a real estate GmbH. A commercial natural person is excluded from this tax advantage. Although the advantage also comes into question with a partnership, such as a GmbH & Co. KG, Immobilien-GmbH is the better choice for our purposes for many other reasons.

Now we come to the concrete measure that paves the way for a real estate GmbH to save trade tax on commercial real estate. This is the so-called extended land shortening. This option is open to a real estate company by application and allows the exemption of taxation in business tax. The legal basis for this is provided by § 9 no. 1 sentence 2 GewStG. However, Immobilien-GmbH may then only hold capital assets in its operating assets in addition to the real estate in order to benefit from the extended land reduction. However, a number of other derogations have now been added.

In order to demonstrate how great the tax advantage in the taxation of commercial real estate by a Immobilien-GmbH compared to a natural person is, we give a calculation example.

Suppose the fictitious persons Mr. Insula and Mrs. Turris are each available EUR 119.000.000 and a plot of land ready for construction of a building. While Mr. Insula wants to invest his capital in a property with rental apartments, Mrs. Turris opts for a commercial property with offices. Ms. Turris is the only one to found a Immobilien-GmbH. After construction, both properties ideally find tenants right away. In both cases, the rent amounts to EUR 4.500,000 per year, which corresponds to the forecast return of 4.5% in each case. We deliberately set the percentage of return so high because we want to disregard the acquisition costs of the property and their influence on the annual return in our calculation example. In addition, there are costs of EUR 1,000,000 each.

Let us now turn to the taxation of real estate. First, we look at the taxes that Mr. Insula has to pay. To simplify this, we assume an income of EUR 4.500,000, for which we only consider the income tax. We ignore any other taxes, such as the church tax. First of all, however, we must also take into account the depreciation for the building. With an estimate of 2% on the costs incurred for the construction of the building of EUR 119.000.000, we arrive at a depreciation amount of EUR 2.380.000. Finally, in this way we arrive at an income of EUR 1.120,000. With an income of this magnitude, we expect a tax rate of 45 % for Mr Insula. Specifically, it is about an income tax of EUR 504,000. However, we must note that the depreciation does not mean an actual financial outflow. Therefore, we calculate the net income of Mr. Insula as follows:

EUR 4.500.000 – EUR 1.000.000 – EUR 504,000 = EUR 2,996.000 income (net)

At Ms. Turris we consider the taxation of the commercial real estate of her GmbH. First, the GmbH can receive the previously paid sales tax of EUR 19.000.000 as input tax back. Then we calculate the corporation tax of the GmbH. First of all, we look at the important depreciation in this context. 3 % of EUR 100,000,000 is eligible for deduction. If you now also deduct the remaining costs, a taxable income of EUR 500,000 remains, for which we now carry out the calculation of the taxation of commercial real estate. This requires a fixed tax rate of 15 %. This corresponds to an amount of EUR 75,000 in taxes. Overall, the GmbH therefore remains a net profit, which we calculate as follows:

EUR 4.500.000 – EUR 1.000.000 – EUR 75.000 = EUR 3.425.000 income (net)

If you look at the taxation of Ms. Turris GmbH alone with the income tax of Mr. Insula, we find that the corporate income tax of the GmbH is about 85% lower. However, we have left a few points out.

On the one hand, we did not take into account the input tax that was refunded to the GmbH by Mrs. Turris. Although it could be used over the period of use of 50 years as an annual tax-free income in our calculations. However, the amount of EUR 19.000.000 is already directly available for further investments. However, an accurate assessment of this financial benefit under this article goes too far. It is therefore justified to merely take note of them in our analysis, without using them in the comparative calculation.

On the other hand, we would also have to fairly calculate the capital gains tax on Ms. Turris’s profit distribution in order to be able to compare it directly with Mr. Insula’s income tax. But a possible executive salary for Mrs. Turris could also play a role in taxation. This consideration also goes beyond the scope of our analysis.

Although we assume a whole series of simplifications in our analysis of the taxation of commercial real estate, we can still state that the tax advantage of renting office real estate through Immobilien-GmbH is very clear. Of course, tax optimization can be further expanded. For example, you can insert a holding company for this. Other advantages, such as the limitation of liability of the GmbH, should also be considered.