In many cases, holiday homes and other self-used properties are not held directly, but through a corporation. This is particularly the case in Spain, which is very popular with Germans, but also in many other regions of the world, such as the United Arab Emirates (Dubai) or South Africa.
However, in a much-publicized decision in 2013, the German Federal Fiscal Court (Bundesfinanzhof, BFH) ruled that the private use of the property by the shareholders, either free of charge or at a reduced rate, constitutes a so-called hidden profit distribution, which leads to taxable income from capital gains for the shareholders in Germany. In a new decision dated October 1, 2024, the BFH once again confirmed its legal opinion and specified when a hidden profit distribution can be assumed and how it should be calculated.
Summary
If a property is not held directly but through a corporation, the shareholders should pay an appropriate rent to the corporation for their private use of "their" property. Otherwise, the private use of the property may be considered a taxable hidden profit distribution for the shareholder. The German Federal Fiscal Court (Bundesfinanzhof, BFH) reconfirmed this in a decision dated October 1, 2024. At the same time, however, the Court clarified that the mere possibility of using the property is not subject to tax.
Reasons for a corporate structure
There are many reasons why a holiday home might be held through a corporation. In many cases, a decisive factor is the (supposed) tax advantages in the state in which the property is located. This includes, in particular, inheritance and gift tax, wealth tax and taxes due on a later sale. However, there are also a number of non-fiscal reasons, such as the preservation of anonymity and protection against unlimited liability.
Private use of the property constitutes a taxable hidden profit distribution
Already in 2013, the BFH ruled that the use of a holiday home by a corporation's shareholders, either free of charge or at a reduced rate, generally constitutes a taxable hidden profit distribution. This has been expressly confirmed by the BFH in a recent ruling of 1 October 2024 (VIII R 4/21).
The hidden profit distribution is subject to income tax for the shareholders in Germany. According to the BFH, the amount of the hidden profit distribution is dependent on the extent to which the property is used privately:
- In the case of a permanent right of use for the property for private purposes, the hidden profit distribution should be determined on the basis of a so-called cost rent, including an appropriate return on capital and plus an appropriate profit margin.
- On the other hand, in the case of an actual private use of the property by the shareholders only on a daily basis, the arm's length price of a short-term rental including an appropriate profit margin should generally be decisive for determining the hidden profit distribution.
- Compared to direct ownership of a property, ownership through a corporation often involves a higher administrative burden and associated costs.
- If the shareholders themselves bear expenses in relation to the property, this generally constitutes a so-called hidden contribution. The hidden contribution is the counterpart to the hidden profit distribution.
- If the corporation makes a profit based on the arm's length rent, this is subject to income tax at the level of the corporation. If this profit is intended to be paid back to the shareholders later, a taxable profit distribution is also necessary.
- If the shareholders of the corporation provide financial resources in the form of a loan, for example for the purchase or renovation of the property, it is important to ensure that the loan agreement is concluded and executed in an arm's length manner.
- If shareholders resident in Germany are appointed to the management of a foreign corporation, it is important to ensure that the corporation does not "accidentally" transfer its place of management to Germany and thereby become fully liable to tax in Germany.
- If a shareholder resident in Germany relinquishes his or her residence and habitual abode in Germany, he or she is generally subject to the exit tax on his or her shares in the corporation. On the other hand, directly held properties are not subject to the exit tax.
Conclusion
Holding a property for personal use through a corporation involves a number of tax pitfalls for shareholders resident in Germany. Therefore, existing structures should be reviewed. A restructuring may be recommendable. We would be happy to assist you in this regard and assist you in developing the best personal solution for purchasing and holding your desired property.
It remains unclear, however, at what point a use is no longer only on a daily basis, but already permanent.
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.
