Investment in German Property Commercial Investor

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Investment in German Property Commercial
Investor

• Peter Fabry
• Baker Tilly Deutschland GmbH, Munich
• 28 February 2008

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Overview

• The content of this presentation is to outline
  tax implications in respect of investing in
  German real property
• Investment via corporation
• Interest deduction ceiling limit

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Investment via corporation

• Real Estate Transfer Tax
• Generally all purchases of real estate are
  subject to RETT
• Purchase of domestic premises
• Change of partnerships
• Purchase of company shares (concentration)
• The tax is computed on the value of the
  consideration given or the value of the real
  estate and is levied at a rate of 3.5
  (exception for Berlin 4.5 ).

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Investment via corporation
Taxation of Irish shareholder in case of sale of
shares
In general taxation in Ireland
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Investment via corporation

• tax rates
• 15 corporate income tax trade tax 29.65

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Investment via corporation

• Trade Tax
• Every business establishment with an operational
  facility within Germany is a taxable unit.
• Commercial real estate companies may apply the
  extended deduction for real estate.
• Practicable if activity consists only of pure
  asset management
• Limitation of extended deduction for leasing of
  tax fixtures or real estate trader
• Possibility structure to avoid trade tax if a
  permanent establishment in Germany is prevented

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Investment via corporation

• Value Added Tax
• Rental income is VAT-free ( 4 No. 12a of the VAT
  Law)
• gt no deduction of input VAT related to tax-free
  rental income
• Alternative exercise the option to VAT ( 9 of
  the VAT Law)
• Tenant is a entrepreneur for VAT purposes and
  renting the real property is for the
  entrepreneurship.
• Tenant uses the rented property for taxable sales
  which grant the deduction of input VAT.

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Interest deduction ceiling rule Significant
systematic changes

• Interest is not restated as deemed profit
  distribution, but disallowance deduction of
  business expenses
• No corresponding restatement of the payee,
  therefore
• Double taxation
• Applies to third-party loans
• Considerable extension
• of the scope of application
• Application independent of
• the legal form

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Interest deduction ceiling ruleBasic application

• Rule
• Interest expenses are fully deductible up to the
  amount of interest income
• A negative interest balance is only deductible up
  to 30 of the (taxable) EBITDA
• profit
• interest paid
• tax depreciation (low-cost assets, collective
  items, s 7 ITA)
• - interest income
• (taxable) EBITDA
• Possibility of avoidance
• Interest balance lt 1m (tax-exempt threshold)
• stand-alone clause (exemption shareholder debt
  financing)
• Equity clause (exemption shareholder debt
  financing)

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Interest deduction ceiling rule Basic application
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Interest deduction ceiling rule avoidance
strategy

• Sphere of influence
• split of companies to use the tax-exempt
  threshold of 1m
• Example structuring of investments of foreign
  investors

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Interest deduction ceiling rule Press commentary
Like a Trojan horse
That would mean that large real estate
portfolios would have to be sold
like a death sentence
threatens the existence of many companies
The interest deduction ceiling limit affects
competitiveness above all of the German real
estate economy.
capital based taxation
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Disclaimer

• Thank you for your attention
• This presentation is for general information
  only. No one should act upon such information
  without appropriate professional advice after a
  thorough examination of the particular situation.