The rise and rise of Germany’s land transfer tax

Long-term readers of REFIRE will have followed with us over the last ten years the inexorable rise of the rate of Grunderwerbsteuer, or land transfer tax, applicable on any real estate acquisition in Germany.

Once the domain of the federal government and set at 3.5%, the federal reforms of 2006 have seen the sixteen individual Länder imposing their own rates, and invariably they have moved in only one direction – upwards - as regional governments desperately look for new sources of tax revenue.

The land transfer tax has now reached 6.5% in a number of German states (Saarland, Schleswig-Holstein, North Rhine-Westphalia and Brandenburg) after a succession of incremental increases. The tax is uniformly paid by private individuals. Institutional investors are generally able to avail of canny accounting solutions that allow them to buy property assets as share deals and avoid the tax almost completely.

Such efforts are particularly worthwhile for investments of €15m upwards, and buyers will now go to great lengths and expense to turn assets into companies and avail of the share deal exemption from the land transfer tax.

Aengevelt Immobilien of Düsseldorf has studied the phenomenon in detail. Their researchers conclude that the pattern of buying via share deals has mushroomed in the past few years. They put the share of all transactions in Berlin last year avoiding the tax in this way at 17%. In Frankfurt it was as high as 26%.

Aengevelt estimates that 20% of all deals now in Germany fall under the share deal category. At last year's total transaction volume of €50bn, and an average transfer tax of 5%, the German fiskus is foregoing at least €500m in tax – about the same amount it distributes to the Länder to provide subsidised housing.

Germany's Property Owners Association BFW (Bundesverband Freier Immobilien- und Wohnungsunternehmen) reckon that state government income from the land transfer tax for the first half year 2015 has hit a record €5.3bn, while the Federal Statistics Office sees full year figures as likely to top €10bn – a doubling of the tax intake over the past five years, with a total of €5.3bn for the full year 2010.

One peculiarity of the land transfer tax is that monies raised by the tax are kept by each federal state and are not treated as revenue for the purposes of Germany's Länderfinanzausgleich, the mechanism whereby transfers take place among Germany's states, from the wealthier to the poorer, to balance out standards of living across the nation.

There is thus a very definite incentive for states to keep raising the tax. Given the still overwhelming tendency of most Germans to rent their private accomodation, politicians are tempted to loot ever more from the land transfer tax, which can then conveniently be viewed as a form of tax imposed on the 'wealthy'.

All Germany's states, bar the actual wealthiest state of Bavaria and neighbouring Saxony, have been getting away with these stealthy increases for the last nine years, and there's no sign yet that a ceiling has been reached.

The president of the BFW, Andreas Ibel, has been publicly criticising what he sees as this mad upwards spiral, with states competing with each other to raise more and more revenue from property.

On the one hand the states are driving up their inhabitants' living costs by imposing ever higher land transfer taxes – while at the same time introducing the Mietpreisbremse, or rental cap, to allegedly keep living costs under control.

However, several studies show that it is not rental increases that are driving up housing costs, but all the ancillary costs including energy costs, garbage removal, street cleaning and other higher charges imposed by local government.

Ibel makes the argument that there is more than an element of fraud in the Berlin government's campaign to encourage Germans to save hard to invest in their own properties as an integral part of their pension planning.

It wouldn't take much, he argues, for the whole programme of promoting affordable housing, and at the same time weaning the population off an over-dependency on modest rents, to become derailed.

The imposition of a 6.5% land transfer tax or stamp duty (tendency: rising steadily), along with the usual 7.14% broker fee and another few percent for notary costs and land registration, means that for the average buyer, his transactional costs very quickly reach 15-16%. The property has to rise by that amount at least in value for the buyer to reach break-even.

Bolstered as the market is by cheerleaders who see little danger based on fundamentals, and given the current buying frenzy which makes such a scenario appear unlikely, a correction of even 15% to the downside would wreak havoc among that wave of new buyers who've recently become proud German homeowners. That 30% swing represents the write-off of any equity and more than most buyers would have had.

If there is one thing that Germany is not geared up for, it's a house-owning population with negative equity. When the current boom blows itself out and interest rates climb back to something like their historical norms, we could be whistling a very different tune here.