As in many other countries worldwide, there is a wealth tax in Germany. Nevertheless, this may seem completely new to most readers who first came into contact with the Treasury after 1997. This is due to the fact that they have so far been renounced. Since the Federal Constitutional Court attested to the property tax law a constitutional violation, the legislature remained inactive; The law simply remained unchanged. Only a small aspect in one of the four asset areas would have had to be changed. Finally, only capital-based taxation was considered too high in relation to other assets. It may also seem strange to us nowadays that at that time one had to regularly make a high effort in the valuation of assets. Even more strange, however, is that the wealth tax in Germany made a triple bookkeeping necessary. But there were various privileges, for example for agricultural and forestry enterprises, large or older taxpayers and, of course, for companies.

In most countries and other tax regimes in the world, including in some tax havens, one knows a taxation of assets. So it is no wonder that there was a wealth tax in Germany. Although the origins of property tax in Germany date back to the times of the Empire, the property tax law introduced in the FRG dates back to 1952. And it is still valid today! Yes, at least this may surprise many of our younger readers, who had no connection to taxes in 1997, at this point.

So how did it happen that the legal basis for a wealth tax still exists in Germany, but no one pays such a tax anymore? An answer to this can be found in the archives of the Federal Constitutional Court. In 1995, it stated that the taxation of real estate assets under the Act was contrary to the principle of equality in the Basic Law. Compared to the taxation of other types of assets, it was significantly cheaper. However, in order to give the legislature the time necessary for a reform of the Property Tax Act, the judgment from Karlsruhe allowed the law to continue to apply until 31.12.1996. But it was different. In any case, there was no reform of the wealth tax law.

In principle, property tax is expressly permitted in Germany according to the Basic Law (Article 106 GG); this was also confirmed by the constitutional judges in their judgment. Thus, the wealth tax is to be seen in particular as a fiscal instrument with which one wanted to establish a welfare state in the Federal Republic.

We will now explain which elements the Property Tax Act still contains in principle, even if they may no longer apply, in this article. And those who want to know what was the reason why instead of reforming the wealth tax law they preferred to waive their collection, may be further eager until the end of the article; It will surprise you.

The legal basis for property tax in Germany is the Property Tax Act. Property tax is a substance tax because, unlike income taxes, which also include income tax, it does not tax changes in value (e.g. profit), but rather existing values (assets). This is therefore a matter of taxation of net assets, so that provision is also made for the deduction of any debt.

Another difference to other usual taxes is the time at which the property tax is incurred. Normally, one always expects the expiry of an assessment period or the occurrence of a tax event at which a tax is incurred. The property tax, on the other hand, already arises from the beginning of each calendar year. A distinction is made between a three-year main investment and a post-investment and a new investment. In addition, a distinction is also made between an individual and a co-investment, whereby in addition to the co-investment of spouses, there are various other options in which children are taken into account.

Both private individuals and private corporations, i.e. corporations as well as foundations and cooperatives, are liable for tax. Public corporations (e.g. cities and municipalities), on the other hand, are spared property tax.

In addition, after reunification, the property tax was not collected in the new federal states.

There is no difference, however, if one considers the wealth tax in Germany with regard to the distinction between unlimited and limited tax liability. In addition, the world income principle also applies here, although there are certain reductions in certain circumstances if assets abroad are also subject to taxation by the respective tax regime.

To tax assets, you also have to define which types of assets you have in mind. In the case of wealth tax in Germany, this affects exactly four asset areas. We will now briefly present them to you in detail.

Agricultural and forestry enterprises must provide information on the associated assets at property tax in Germany. This means that agricultural and forestry land (grass, fields, forests, vineyards) as well as livestock are included. Even the buildings belonging to the operation, including land, are subject to property tax according to the law.

For business assets, which are also subject to property tax in Germany, this naturally includes all assets that serve the company in an economic manner. This means both the usual assets of fixed assets and current assets. Intangible assets are also subject to property tax in Germany. Only land belonging to business assets which does not serve an operational purpose should be treated differently. Because here it applies that they belong to the asset area of basic assets.

Covers all real estate that is not part of an agricultural or forestry operation or other enterprise. So both property in own use and rented or leased land and buildings belong to this category.

Other assets include all other assets. Without giving comprehensive information, we enumerate some important examples of this: financial assets (cash or bank assets) in German mark or foreign currency, receivables, securities, precious metals, jewellery, luxury goods (for example antiques), objects of art and much more.

Now that we know what types of assets are relevant in wealth tax, let’s look at the exact circumstances of taxation. Of course, we continue to divide our further approach according to the respective asset areas.

In principle, a tax rate of 1% applies to property tax in Germany for natural persons. In contrast, corporations pay 0,6 % of property tax. However, there are exceptions for beneficiary assets, which we explain separately.

In addition, the taxable base actually consists of all relevant assets. Further adjustments by allowances on certain assets may reduce the rateable amount. From all taxable assets, one deducts any debts and thus receives the net assets.

Then you can set a number of possible free amounts. Thus, in principle, in the case of individual investments, DM 120,000 is provided, which can be doubled to DM 240,000 in the case of combined investments. A further DM 120,000 is granted for each child under 18 who lives in the household of the parents and thus performs a co-disposition with them. In addition, there is also an allowance over DM 50,000 if you are 60 years or older. Even with a disability with a degree of disability of 100%, such an allowance on the property tax is available in Germany. This results in a quadrupling of the allowance if more than one person is affected by it when invested together.

The law also provides for exemptions on property tax in Germany for cooperatives and associations that operate agriculture or forestry. Under certain conditions, DM 100,000 should be available as an allowance in the first ten years after the foundation.

If several assets are subject to property tax, then the taxable beneficiary assets must be considered first. Any remaining balance is then subject to the regular tax rate.

4.1.1. Valuation principles

In order to apply a property tax to agricultural and forestry enterprises in Germany, one must first make an assessment of the associated assets. The principle applies here that unit values based on the yield value are used for this purpose. Thus, in principle, the yield value of an agricultural or forestry holding is decisive in determining its economic value. In certain cases, certain increases and reductions are added.

In addition, a housing value can also be relevant in the evaluation of an agricultural and forestry operation. After all, often residential buildings also belonged to such a company. The housing value is determined according to the same methods as for the valuation of real estate (see there).

In order to determine the unit value required for the calculation, it is necessary to summarize the economic value and the housing value and assign them to the required unit values. These unit values are based on historical values that originally date back to 1935. Later, the legislature updated it to 1964. However, this took place exclusively for the old federal states. In the new federal states, however, the unit values of 1935 still apply.

Due to the fact that the unit values no longer correspond in any way to the state of 1996 – let alone 2021 – this leads to a unit valuation that corresponds to about 1% of today’s market value.

4.1.2. Taxation

Agricultural and forestry holdings belong to the beneficiary assets. When calculating the property tax on agricultural and forestry enterprises in Germany, only half is used instead of the regular tax rate of 1%. Thus, agriculture and forestry is privileged in another way in the wealth tax in Germany in addition to the favorable unit valuation.

4.2.1. Valuation principles

In the valuation of operating assets, the sub-value is used as a basis for assessment. In this case, allowances which reduce the taxable operating assets can also be set. So you subtract up to DM 500,000 for a positive unit value. In addition, if a taxable remainder remains, only 75 % is subject to taxation.

If real estate is also included in the assets, they are valued differently according to the regulations for real estate.

4.2.2. Taxation

There are also reliefs in the taxation of business assets, because this is also part of the tax-advantaged assets. Here too, a tax rate of only 0.5% is provided. In this way, the legislature wanted to relieve another industry in Germany in terms of wealth tax.

4.3.1. Valuation principles

Basic assets, on the other hand, are valued again with a historically proven unit value, which was also determined via the income value method. Depending on the location of a building, different unit values are considered: those from 1964 for the old federal states and those from 1935 for the new ones.

But even the unit values that are used in the valuation of real estate can hardly be regarded as current, because since 1964 no new main determination procedure has taken place in Germany. This is accompanied by the fact that the valuation of real estate is basically always below the actual market value. In other words, in Germany, the valuation approach for the tax treatment of real estate under property tax is relatively low.

4.3.2. Taxation

The property tax on real estate is normally incurred at 1%.

4.4.1. Valuation principles

For other assets again the partial value applies, i.e. the value that is considered appropriate in economic traffic. With financial assets, this is still the easiest possible. Even with listed assets, the value can be determined in a relatively simple way over the current price at the beginning of the year. In addition, the nominal value of exposures shall be used as the valuation. However, for other assets falling under the heading of other assets, an expert opinion is required.

However, facilities are provided for certain assets. For example, only 40% of works of art or cultural goods, as well as historical testimonies or scientific collections for the preservation of which there is a public interest, are considered. Of course, certain formal conditions must be met for this, such as proof of their general significance by means of appropriate expert opinions.

4.4.2. Taxation

The regular tax rate of 1% is also applied here. In the end, however, the taxation of other assets represents the partial aspect of wealth tax in Germany, for which there are the fewest possibilities for tax optimization in the law.

One of the reasons why the collection of property tax after 1996 in Germany was waived is that the abolition of the tax had been discussed for a long time. Compared to other types of tax in Germany, the importance of wealth tax decreased significantly in the 1980s. At the same time, the administrative costs associated with their collection increased. Since the property tax was also determined by means of long-outdated unit values, the consideration of whether a new main determination procedure should be initiated was certainly relevant. However, such a procedure would only be possible with a considerable administrative burden. Since this seemingly disproportionate effort was spared – and in fact has been omitted to this day – this approach, which would also have contributed to the reform of the wealth tax law, had to be disregarded.

But besides all these factors, there was another, purely politically motivated thought. At that time, the CDU/CSU administration ruled under Helmut Kohl and in his cabinet, Theo Waigel of the CSU was responsible for the financial department. The Bundesrat, on the other hand, dominated a majority of SPD-led federal states. And since the wealth tax in Germany fell solely to the federal states, the waiver of the further collection of the wealth tax in a reformed form was quite a suitable way to hit the political opponent. So there were several reasons for giving up the wealth tax in Germany.