With Germany's planned reforms to its Grundsteuer, or land tax, due to take effect from 2025, the country's municipalities are in a race to capture relevant data on up to 36 million buildings across the land to determine what property taxes will apply to which land and buildings.
The Bundesrat's approval of the land tax reform was finally sealed in November 2019 after protracted negotiations. What it means is that every property in the country will fall into the tax net, and will be subject to a once-yearly bill, payable to the local municipality. It is a fundamental change to the way property values have been determined in the past.
Land tax is the German government’s third largest source of income, bringing in €14 billion a year. However, it has long been accepted that the system urgently needed a shake up, a fact recognized by the Federal Constitutional Court which gave the government the 2019 deadline to come up with a system that no longer relies on fully outdated criteria.
Over the coming weeks and months, each federal state will have to determine how it plans to calculate the tax. A federal model has been developed, and seven of Germany's sixteen federal states have indicated that they plan to adopt that method. Baden-Württemberg and Hamburg have already announced plans to go their own separate way, while Saxony and Saarland are adopting the federal model but with some minor adjustments. A handful of states are still undecided on their favoured model.
However, they are all under pressure as the deadline for submission of data underpinning the new valuation calculations is on January 1st 2022 - only nine months away.
After this initial evaluation, land will be revalued every seven years. Taxpayers will then be subjected to an additional burden of filing a declaration at the beginning of the following calendar year notifying of any change in circumstance which might effect the value or the type of property.
The new tax itself will essentially be calculated using a three-step procedure, which is designed to determine the value of the underlying property, in line with each state's adopted model. The tax will then come into force on the 1st January 2025.
Different criteria will be used to evaluate residential and commercial properties. Under the new valuation, the first step will be to calculate the Grundbesitzwerte - the notional value of the land and the property - as well as the potential rental income. In short, the higher the potential rent, the higher the Grundsteuer will be. The second step will be to bring values up to date, given that in eastern Germany, recent values were calculated based on 1935 levels, or those from 1964 in other parts of the country. In order to promote social and affordable housing, an additional discount will be offered to companies who offer them. Lastly, if land tax revenues in some municipalities are affected due to newly calculated rates, local governments will be permitted to make adjustments to ensure they are not raising more capital from land tax than before the reform.
To calculate the Grundbesitzwerte, there are two methods available: the yield value method, which applies to residential properties, and the asset value method, which applies to commercial buildings.
The yield-value method picks up on the productivity of a building and the yield it can generate. The calculation takes into account the annual gross rent – whether the building is rented or owner-occupied – and then deducts the operating costs. It also takes on board the present value factor, i.e. the useful life left in a building and its age, to which you add the discounted land value. The asset value method for commercial properties looks at the value of the land and building as well as the market value. It also takes into account factors such as the construction cost and depreciation. A starting point for the evaluation will be flat-rate amounts listed in several attachments to the German Evaluation Act.
What will the new valuation model mean for homeowners and renters? Renters already pay the land tax, albeit indirectly, via their Nebenkosten, or utility charges. The average land tax in 2016 was €390 a year, according to the Cologne Institute for Economic Research (IW).
The political aim is that the new Grundsteuer should be neutral – overall – and that municipalities should not expect to raise more capital from the new tax than before. Experts that REFIRE has spoken to are agreed that it's difficult to say whether land tax revenue overall will increase as a result or not. However, as a general rule, the tax to be levied in 'expensive' locations (like downtown) will be highest for condominiums and lowest for houses, while larger plots of land and residential areas will be taxed heavier than smaller ones.
Importantly, to prevent land hoarding and to encourage landlords to exploit the property, as part of the new bill, a new land tax “C” will come into force for undeveloped building plots which are ready for development. This will enable the different municipalities to set their own tax rate in a bid to incentivise development. And, in contrast to the government’s original draft, the municipalities can not only assess land tax “C” on building land and cases involving special housing needs but also if required for other urban planning reasons, according to a study on the tax by consultants PwC.
