German state finance ministers look to block tax avoidance

It has become an increasing irritant for finance ministers in Germany's sixteen federal states that investors in real estate are increasingly exercising a loophole to avoid paying Grunderwerbsteuer, or land transfer tax, when buying property.

The normal buyer of a property in Germany has to pay the tax when he buys property. The tax can range from 3.5% to 6.5% depending on the federal state, but most states have steadily increased the tax rate to close to the higher level since 2006 when the government in Berlin decentralised the setting of the rate to the individual states. Only Bavaria and Saxony have left the rate at 3.5%.

Professional investors often avoid the tax by creating a company to buy their assets in share deals. This enables them to escape the tax, by in effect buying up to 95% of a company, rather than investing directly in property. Now the sixteen finance minsister have given themselves until mid-November to come up with proposals as to how they can get their hands on more of this money, which is estimated at more than €1bn a year.

Hessen's finance minister Thomas Schäfer is spearheading the campaign to tax professional investors. After a meeting of his peers in Berlin last week, Schäfer said to the press, "We have to do something about this now. While every small house-owner is being taxed, millions of euros worth of investments are bypassing the fiscus through cheating and trickery, which is both unfair and unjustifiable."

The advantage to the states of getting their hands on the tax is that they get to keep whatever they raise – in other words, the revenue is not treated as income for the purposes of determining their contribution to Germany's "Länderfinanzausgleich", or inter-state fiscal adjustment, where wealthier states pay in to subsidise the poorer states.

Last year property turnover in Germany was €80bn, which brought in €11bn in property transfer tax – double the amount raised in 2010. However attractive for the politicians, the tax is controversial, because it is seen as making home ownership more expensive for the average citizen, and for encouraging tricks for its avoidance.

Meanwhile, in Stuttgart the reigning Green-CDU coalition government headed by Green Party member Winfried Kretschmann has postponed a proposed rise in the property transfer tax from 5% to 6.5%, given the healthy state of other tax revenues from the region's thriving economy.