KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.
Prior to 1 January 1994 it was possible for foreign persons including foreign corporations to own and dispose of German real estate after a two year holding period without any German tax liability on the sale as long as they avoided creating a permanent establishment or having a permanent representative in Germany. Under many tax treaties, the gain on sale was also free of tax in the foreign person's country of residence. Germany's tax laws were, however, amended to reduce the possibilities for such schemes from 1994 on (new section 49 par. 1 no. 2 (f) EStG). It now is insufficient to avoid a German permanent establishment. Instead, business activity in Germany must be avoided altogether.
A ruling issued by the Federal Ministry of Finance on 15 December 1994 clarifies the position of the tax authorities on various aspects of the new statute.
Capital gains realised by foreign corporate entities on sale of German real estate will always be subject to tax in Germany. This is because the German real estate sales of foreign corporations are now deemed to constitute a business irrespective of actual scope. Capital gains realised by foreign corporate entities on sale of interests in partnerships owning German real estate are, in the opinion of the tax authorities, treated as sales of the underlying property and as such also subject to tax.
If the property is held by a foreign individual, taxation depends on whether the sale is part of a business activity. Real estate sales alone will not constitute a business activity if no more than three properties are sold within a period of five or in some cases ten years ("three sale limit"). The new ruling states that sales of foreign real property count towards this limit.
As for property held by partnerships, the above rules apply on a look-through basis. Foreign corporate partners thus are taxable on their distributive shares of partnership gain from sale of German real property by virtue of their corporate form. For partners who are individuals, a determination is first made whether the partnership is engaged in a business. This involves applying the three sale rule to the partnership. If the partnership is engaged in a business, the capital gain is taxable.
Even if the partnership is not engaged in a business, the capital gain can still be taxable if the partner is engaged in a business. In making this determination, sales by the partnership are attributed to the partner for purposes of the three sale limit if the partner's interest in the partnership is 10 % or greater (10 % partners). Furthermore, sales by 10 % partners of interests in German real estate partnerships are treated as sales of each underlying property. If a 10 % partner sells an interest in a partnership holding four pieces of real estate, he is deemed to have sold four properties and exceeded the three sale limit by reason of this transaction alone.
The new ruling makes clear that the tax authorities intend to apply these rules to foreign individuals exactly as to domestic ones.
In general, resolution of questions under the three sale rule is a complicated matter and requires expert advice. The above is a highly simplified summary of the issues involved.
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. 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.