Politicians step up the pace to close German property tax loophole

It has long been a thorn in the side of Germany's sixteen individual state ministers of finance that clever corporations are able to voice the Grunderwerbsteuer, or land transfer tax, when buying property. Individuals are unable to avoid being liable for the tax, which can add up to 6.5% to the cost of buying property.

Now Germany's ministers of finance are getting serious about closing off the loophole that favours professional investors. First proposals have been drafted, and the ministers are meeting again in March 2017 to progress their plans. They've set themselves a deadline of October next year to have working proposals in place.

Thomas Schäfer, minister of finance in Hesse, a leading proponent of the drive for change, told the media recently that concrete plans were afoot, still shrouded in secrecy "to avoid quickly seeing evasive movement being taken by those involved in transactions worth millions", and so as "not to stimulate the imagination of those involved too early."

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%.

The rate in Thüringen is set to rise in January from 5% to 6.5%, a move being similarly discussed in Stuttgart for the state of Baden-Württemberg. Saarland, North Rhine-Westphalia and Brandenburg raised their rates to 6.5% last year, while Berlin, with a huge housing shortage, is still charging 6%. According to property finance brokerage Interhyp, the rate has been raised 25 times across all the Länder in the last ten years, doubling the tax take for the authorities over the period.

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 94.9% of a company, rather than investing directly in property. It is not normally difficult to bring in a co-investor to buy the remaining 5.1%, and hence escape the tax.

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.

REFIRE: Among the proposals being examined is lowering the threshold to three-quarters of the ownership of the company in a 'share deal', rather than the current 94.9%. This could be even lower in the case of purely residential housing, making it more difficult to circumvent tax.

There are even proposals for the lowering of the Grunderwerbsteuer back to more historically common levels, on the grounds that for the sake of a few percent many companies would not undertake the administrative and compliance burden of having to find a third-party partner. 

This might indeed make sense, although initially it would be a speculative move in advance of knowing the effects for sure. Most politicians would not have the courage to give up a sure thing in favour of something with an uncertain outcome.

The head of the CDU party in Baden Württemberg, Thomas Strobl, campaigned ahead of his state's parliamentary elections in March this year with the promise of abolishing the tax for first-time buyers. He is now his state's interior minister. Not surprisingly, all talk of getting rid of the tax has has now miraculously become talk of how to increase it. That's political reality for you.