Germany is certainly no tax haven. In addition to income tax, corporate tax, German trade tax and real estate purchase tax, Germany has a gift and inheritance tax system in place which is also relevant for foreign investors.
For an Israeli investor there are different structures possible as to how invest in German Real Estate.
However, in order to optimize the tax structure, the investor has at the outset to be aware and clear of the different phases of a Real Estate Investment and the overall goal of his investment. There are basically 3 different phases in a real estate investment: Purchase, holding of the real estate/rental phase and the sale of the real estate. Depending on the importance of each phase for the investor the optimal tax structure will be different.
Please find a short overview of the basic possible structures for investments into German Real Estate:
- Direct investment by the individual
- Investment through a German limited Partnership (GmbH & Co KG)
- Investment through a German limited Corporation or through a foreign Corporation (Israeli, Luxembourg, Cyprus or Israeli Family Corporation)
- Or investment through a combination of the above mentioned vehicles.
- Direct Investment by an Israeli Individual
For a smaller investment it might be advisable that the Israeli individual purchases the real estate directly in his name. With respect to the rental income he will be subject to the German progressive tax rate of 14% – 45 %, plus 5.5 % solidarity surcharge amounting in an effective maximum tax rate in Germany of 47.475 %. The Israeli investor will be required to file a German tax return. Upon sale of the real estate the gain will be exempt from German tax, if the real estate is held privately for more than 10 years. The Israeli individual is exposed to German gift and/or inheritance tax, because German real estate is considered German situs property.
On the Israeli side, the Israeli investor will be required to file a tax return in Israel. He will be credited for the German tax paid. Upon sale of the real estate after holding it for 10 years the gain might be exempt from German taxation however it will be taxed in Israel with a capital gain tax rate of 25 %.
In summary, the direct investment by an individual in German real estate will result in the same tax burden as if the investment would have been made in Israel.
- Investment through a German Limited Partnership (GmbH & Co KG)
This structure is very common for investment in German real estate by foreigners.
A GmbH & Co KG is a partnership where the unlimited partner is a German limited corporation. The unlimited partner can be an individual, a German corporation, an Israeli corporation, including an Israeli Family Corporation or any other foreign corporation. For tax purposes the partnership is considered transparent. Depending on the structure of the partnership as a mere property holding partnership or as a commercial partnership, the German tax implications are different. In this respect proper planning is certainly crucial in order to avoid the cumbersome German municipal trade tax imposed on business income. Furthermore the tax burden is different if the limited partner is an individual (German progressive tax rate amounts up to 47.475 %) or a corporation (German corporate tax rate is 15 % plus 5.5 % solidarity surcharge amounting in a tax burden of 15.825 % without trade tax).
If properly structured, the sale of an interest in the partnership can have some tax advantages if the interest in the partnership is sold after a holding period of 10 years. The German gift and/or inheritance tax can be avoided if the interest in the partnership is held by a foreign corporation. Depending on the goal of the investment and the structure of the partnership the GmbH & Co KG structure provides in a lot of cases an optimizing solution for Israeli taxpayers when investing in German Real Estate.
- Investment through a German or a Foreign Corporation
Another possibility to invest in German Real Estate is through a German corporation (GmbH) or a foreign corporation (Luxembourg, Israel, Cyprus). With any investment through a corporation there are two levels of taxation: One on the corporate level and one upon distribution to the shareholder.
Corporate tax rate in Germany is 15 % plus 5.5 % solidarity surcharge resulting in a corporate tax burden of 15.825 %. However, with the choice of a corporate structure there is the risk that in addition to the German corporate tax, the municipal trade tax is imposed on business income. The rate of the trade tax depends on the location of the business within Germany and can vary between 7 % and 17.2 %, so that the actual effective tax burden of a corporation doing business in Germany can range between 30 % and 33 %. In some cases, through proper planning of the real estate investment, this additional trade tax can be avoided. In connection with the second level of taxation upon distribution to the shareholder, the tax rate for the dividend depends on the fact whether the recipient is a corporation or an individual. Reduced tax rate might apply according to the German – Israeli tax treaty on the avoidance of double taxation.
If the primary goal of the investor is not the distribution of the profits, the corporate structure might have an advantage because of the relatively low German corporate tax rate of 15.825 %, provided there is no trade tax. In addition, upon the sale of the shares in the corporation in contrast to the sale of the real estate the corporate structure, if properly planned, can provide a tax benefit for the Israeli investor. The investment in German real estate through a foreign corporation will also eliminate the exposure to German gift/inheritance tax.
Before investing into German Real estate proper planning is crucial. The possible structures vary depending on the goal of the overall investment and on the specific facts and circumstances of the individual investor. This outline is only a short overview. For a more detailed consultation you might seek separate legal advice.