Substantial Trade Tax reliefs

German Real Estate Companies - Substantial Trade Tax reliefs for the supply of renewable energy to tenants, charging stations for electric vehicles and other activities (e.g. letting of fixtures)

1. Status Quo

Under the Extended Trade Tax Deduction” (“ETTD”), German real estate companies may exempt their real estate income from Trade Tax. Trade Tax accounts for approx. half of the total income tax charge of such a company. The other half is the Corporate Income Tax plus Solidarity Surcharge at a rate of 15.83%.

The supply of self-produced energy (e.g. from solar panels) as well as electricity supplies to tenants by way of installing charging stations for electric vehicles, for example on the parking lots let to the tenants on a long-term basis, may be considered to be “harmful” services for the ETTD. As a consequence, the ETTD for the real estate income is not available at all. This is even the case for other buildings held by the same company without such harmful services.

Beyond the harmful energy supply, the letting of fixtures (in commercial buildings) may be harmful since they do not fall under the relevant definition of real estate. As a consequence, applying the ETTD for commercial buildings such as shopping centers, hotels or logistics buildings may turn out to be difficult and / or require careful tax structuring.  

2. Proposed Changes

Under the Fund Jurisdiction Act (“Fondsstandortgesetz”), substantial reliefs shall be introduced:

• For the supply of electricity from renewables (in particular solar power); and
• For operating charging stations for electric vehicles or electric bicycles.

Income from the activities shall no longer be harmful (not exempt!) always under the condition that the income from these activities does not exceed 10% of the rental revenues from the letting of real estate.

Beyond this, (other) income from direct contractual relations with the tenants of the real property (e.g. the letting of fixtures) shall not be harmful if such income does not exceed 5% of the rental revenues from the letting of real estate.

The new rules shall apply for as of the fiscal year 2021. The Fund Jurisdiction Act will still need to pass the upper house of parliament (“Bundesrat”).

3. Comments on the Proposed Changes

The proposed changes are an important step. They shall resolve major obstacles which real estate companies are currently facing (see above). However, it should be noted that in practice these activities will still need to be identified in order to:

• secure that the relevant threshold (10% of the rental revenues) is not exceeded and
• be subjected to Trade Tax separately.

Further, especially with respect to the letting of fixtures, it may still be necessary to separate the fixtures into separate companies:

• either if the harmful threshold (5% of the rental revenues) is exceeded; or
• because of an intended sale of the property.

The wording of the newly planned relief should only cover income from the letting, but not any sales proceeds in relation to fixtures.