According to the law, a property owner is entitled to a tax abatement in the amount of 25 percent of the real estate tax if the actual income generated by the property is more than 50 percent below the usual income for comparable properties in the respective calendar year.

In the case brought before the Federal Finance Court [Bundesfinanzhof, BFH], an office and storage building had only been partially rented out in 2008, and hence in January 2009 the owner applied to the Tax Office for a partial abatement of the real estate for such year. The authority rejected this request, stating that the minimum income threshold of 50 percent that was required pursuant to the new statutory regulation had not been reached.

Municipalities would have had a deficit of 300 million euro

The minimum threshold for a claim to a real estate tax abatement was introduced by the legislator in 2008 with effect for the real estate tax abatement of the same year. Previously, a claim to an abatement of real estate tax had already existed if the reduction in income had amounted to at least 20 percent, and that is to say in the amount of 80 percent of such reduction in income.

The statutory tightening of the required income reduction threshold was adopted by the legislator just before the expiry of the calendar year 2008. It was therefore disputed whether or not it is still constitutional on grounds of the violation of the constitutional provision prohibiting retroactive effect, which applies to laws.

The Federal Finance Court affirmed this: Had the legislator not amended the provision, considerable unexpected tax losses would have been the result. The Federal Finance Court and, following its example, the Federal Administrative Court [Bundesverwaltungsgericht, BVerwG] in 2007 and 2008, respectively, had indeed amended their former jurisprudence to the effect that the municipalities would have to accept lower income. Through the amendment of the law at the end of 2008, this would be balanced out in an amount of about 300 million euro per year. In this way, according to the Federal Finance Court, the constitutionally stipulated principle of proportionality is observed (judgement dated 18 April 2012, docket no. II R 36/10).

Reduction of rental income can also be typical or temporary

Moreover, it was disputed whether or not the law still lies within the scope of the room to manoeuvre, the so-called authority to standardise types, that is granted to the legislator. The Federal Finance Court affirmed this because, pursuant to the prior amendment of the jurisprudence, the increase in the required minimum income threshold would lead to a fair distribution of the burden between the municipalities and the property owners.

The supreme finance court judges also explained the grounds on which a reduction in the actual rental income would justify a real estate tax abatement. The reduction may not be refused if it is typical or temporary. This applies to all unresolved cases, that is to say including cases prior to 2008. Several administrative courts deciding on real estate tax abatements in the larger federal states also ruled after 2008 that certain temporary or typical income reductions did not justify a real estate tax abatement, for example a temporary vacancy following a tenant's termination.

The Federal Finance Court ultimately made it clear that the unconstitutionality of the taxation value assessment cannot be asserted within the scope of proceedings concerning real estate tax abatements. That the Tax Office calculates the real estate on the basis of the value situation in 1964 (respectively 1935 in the new federal states) and therewith treats old buildings like new buildings, is perceived by many to be a violation of the principle of equality – an issue which was also addressed by the claimant in these proceedings. The Federal Finance Court ruled that this problem is not the subject matter of proceedings for a real estate tax abatement. Hence, we will initially have to await the outcome of the constitutional complaint pending in this matter (docket no.: 2 BvR 287/11).

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