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The German 1997 Annual Tax Act
The German 1997 Annual Tax Act (Jahressteuergesetz 1997) was enacted into law in December of 1996 and has since entered into force. Most, but not all, of its provisions take effect on 1 January 1997. Please note that this article is one of a 14-part set of articles describing the 1997 Annual Tax Act.
VI. TAX VALUATION ACT
The new legislation makes major changes in the valuation of real property.
Previously, real property was valued on the basis of its standard assessed value as at 1 January 1964. For real property in the New German States, the standard assessed value as at 1 January 1935 was used. For unimproved property, this system resulted in assessed values of roughly 15 % of fair market value. The assessments for improved property ranged from 15 % to 25 % of fair market value.
The 1997 Annual Tax Act replaces the former comprehensive valuation of real property with a system under which real property is only valued as the need arises, i.e. when this becomes necessary for the assessment of tax. Fixed valuation record dates will continue being used as reference dates spaced at six year intervals, beginning with 1 January 1996.
The new system measures the value of unimproved property (vacant land) on the basis of its surface area and the land reference value (Bodenrichtwert) less 20 %. This yields a property value of approx. 80 % of fair market value. If the taxpayer demonstrates, e.g. by expert opinion, that the true resale value is less, the lower value will be used. However, in this case no 20 % discount is made.
In the case of improved (built upon) property, distinctions are no longer made according to types of property. The value is basically determined using a simplified capitalised earnings approach, which includes the value of the land itself.
The valuation process starts with the average net annual rent without heat or utilities and without operating costs during the three years preceding the applicable valuation record date. For property which the owner himself uses, or which he permits unrelated parties to use free of charge or close relatives to use for a fee, the normal local rent is used instead of net annual rent. A uniform multiplier of 12.5 is then applied to the appropriate base rent. The sum yielded is then reduced by 0.5 % for each year of building age or 25 %, whichever is less. A 20 % increase then applies to the values of one and two family houses.
The same procedure applies to property under construction as well. The base rent in this case is the rent which could normally be realised after the structure is ready for occupancy.
The 1997 Annual Tax Act also provides that improved property is not to be valued beneath the assessed value it would have as unimproved property, i.e. at 80 % of its land reference value.
It is possible in the case of improved property as well to prove a lower resale value. Again, a value so proven is not subject to further reduction for the age of the building.
If the normal rent for improved property cannot be determined, e.g. because the structures in question were constructed for use in particular manufacturing processes, for special uses, or to house specific equipment and facilities (industrial structures), the value of the land is determined at 70 % of the land reference value and the building is valued as shown in the tax balance sheet.
These changes have impact on the following taxes:
- net worth tax, assuming it remains in force (see below)
- gift and inheritance tax
- real estate transfer tax.
The new procedure applies from 1 January 1997 on except for inheritance tax purposes, where it is applied starting 1 January 1996.
The next main valuation record date for determining the standard assessed values of economic units of business property is 1 January 1999.
In the New German States, the 1935 standard assessed values continue to function as the basis for valuation for purposes of the trade tax on earnings (sec. 9 no. 1 GewStG). Depending on the type of real property involved, the standard assessed values are increased by multipliers ranging from 100 % to 600 %.
This article is one of a 14-part set of articles entitled "The German 1997 Annual Tax Act" in which we have endeavoured to provide a useful overview of what we consider to be the major changes made in the German laws by the 1997 Annual Tax Act and, more selectively, by other recent legislation. To access the other articles in the set please enter 'The German 1997 Annual Tax Act', 'KPMG Tax Advisers' and 'Business Monitor'. We are of course at your disposal to discuss in depth the ramifications of new provisions which are of particular interest to you.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.