Article by Prof. Dr. Günther Strunk and Dr. Nils
With the Annual Tax Act 2009, the German tax legislator has
stated that foreign corporations renting domestic real estate would
be considered to be generating income from trade and business.
Under tax law applicable until 31 December 2008 rental income of
non-resident corporations was only treated as income from trade and
business if it was generated in the context of a domestic permanent
establishment or permanent representative. This change in
classification has far-reaching consequences for the taxation of
non-resident real estate corporations and which are not already
Tax accounting and duty to keep books and records
With the general classification of rental income as income from
trade and business it is now undisputed that the income is
determined by balance sheet accounting or if not obliged to keep
books instead by cash-flow accounting. Not clarified is the
applicability of a rule of the German General Tax Act due to which
a duty to keep books could derive if certain thresholds regarding
turnover and profit respectively are exceeded. However, a duty to
keep books does not start until the beginning of the business year
following the demand of the fiscal authorities.
The determination of income by balance sheet has impact on the
tax deductibility of interest liabilities. In the past when income
was determined by cash flow accounting, interest expenses were not
deductible until outflow. Since in many cases real estate
acquisitions were leveraged beside bank loans by shareholder loans
with deferred interest, interest was not deductible until payment.
In line with the determination by balance sheet even deferred
interest decreased current income. The applicability of the 2008
introduced interest limitation rule when the non-resident
corporation has no domestic commercial establishment is currently
Moreover the classification as income from trade and business
and therefore business property allows under certain circumstances
a higher regular depreciation and write-down to fair value.
Although income from renting the real estate is classified as
income from trade and business, no trade tax arises since the real
estate typically does not qualify as an establishment and therefore
not as a trade or business for purposes of German trade tax.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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