In the year 2000, a decade after the fall of the Berlin wall and the historic reunification between the two parts of the country (the capitalist West and the communist East), the German government put into effect a great number of reforms, among them a comprehensive reform of taxation. The goal was to improve the standard of living for German citizens as well as increase the profitability of real estate investment and the German capital market. To ensure that any sort of income of German citizens as well as foreign residents will be taxable, it had to result from a defined source in legislation, such as income from business and profession, salary, capital gains, agriculture, forestry, rent and other income. As a result of this reform, to date Germany offers cheap and at the same time Europe’s highest quality properties (for rent and for sale).
The German Civil Code BGB and Real Estate
When it comes to taxation in real estate, the German Civil Code BGB distinguishes between income from real estate investment business and revenues from private real estate. Furthermore, thanks to great diplomatic relations between Israel and Germany, both countries agreed on certain tax benefits for Israeli real estate investors as part of the increasing economic cooperation between the two countries.
Property acquisition tax and property tax
According to German law, anyone who purchases real estate in the country will be charged acquisition tax and property tax. Property tax in Berlin amounts to 6% of the property value and will also be imposed on the purchase of real estate shares (when acquiring 95% of the company’s shares or more). In fact, this is a municipal tax levied by the local authorities where the property is located. In addition, a yearly property tax at a rate of 0.035% will be charged, based on the initial (lower) purchase price of the property and not its current value.
Property acquisition tax in Germany
According to German law, acquisition tax applies to the buyer and has to be paid to the tax authorities. In Berlin, Hamburg and Saxony-Anhalt purchase tax is 6% of the property value, in Brandenburg 5%, Bremen 4.5%, Lower Saxony 4.5% and Saarland 4%. Starting 2013 the tax rate in Schleswig-Holstein has been increased to 5%.
VAT in Germany (indirect tax)
As of May 2008 the German VAT is 19% and has to be added to all charges and fees of German service providers including real estate brokers, notaries, mortgage brokers etc., however, property acquisition tax is exempt from VAT.
Additional cost when buying real estate in Germany
When applying for mortgage, similar to existing regulations in Israel, the debtor must purchase life insurance policy. Furthermore, when acquiring a building or commercial buildings, an expert has to be hired to execute a thorough inspection of the building and a Due Diligence report. It is recommended to choose a professional company and include general inspection of all systems, such as sanitary installations, plumbing, electricity, etc. Sometimes the property purchase is made by acquiring the company that owns the property. In this case it is crucial to have this company thoroughly examined to ensure that no debts or previous liabilities exist beyond the ownership of the acquired property.