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German Bundestag
The government rakes in €14b a year in land tax, making it their third largest source of income. However, the system is in dire need of a shake up, a fact that is recognized by the Federal Constitutional Court which has given the government until the end of this year come up with a system that no longer relies on outdated criteria.
Germany’s Constitutional Court has ruled that the country’s Grundsteuer(land tax) is obsolete, it announced earlier this month, paving the way for a much-needed shake-up in the market.
‘The underlying values being used to evaluate properties are too old,’ Roland Franke, head of law, taxes and financial market regulation at the German Property Federation (ZIA), told REFIRE. ‘Given that the housing market has developed differently across the country, it was clear that something had to change.’
The Constitutional Court has given the federal government until the end of 2019 to come up with a new method of calculating the tax. Once the new law has passed in the Bundestag, the government will have a bridging period until 2024 to start levying the tax accordingly, a timeline that reflects the work involved to reassess the country’s 35 million properties.
Land tax is one of the most important levies generated by local governments in Germany, raising around €14b every year. And while the tax is applicable to anyone who owns a property, in practice many renters pay it too because landlords typically pass it onto them via their ‘Nebenkosten’, or supplementary charges. The average land tax in 2016 was €390 a year, according to the Cologne Institute for Economic Research (IW).
What is likely to happen next? Many in the industry expect the government to come up with a new land tax model that is based on a variety of factors and not just the current sale price of a property. To that end, several models have been touted, according to Dr. Ralph Henger, a senior ecomomist at the Cologne Institute for Economic Research.
‘In order to keep it simple, we like the idea of taxing the land, rather than the property itself,’ he told REFIRE. ‘The tax would be based on the underlying value of the land.’
Not everyone agrees: ‘This model is problematic as a site could house a single-family home or a block of apartments, so it wouldn’t be fair to charge them the same,’ Franke said. For Georg von Wallis, head of tax at law firm Greenberg Traurig in Berlin, the concern with a flat tax on the land is that ‘this would create a fundamental shift in the tax burden between inhabitants, particularly if their home is situated on a large plot’: ‘Equally, if your building is protected as a monument, you are not permitted to add other buildings in a way that your neighbour - whose plot is not protected – could,’ he said.
Another proposal from the states of Bavaria, Baden-Württemberg and Hessen is the so-called ‘Südländermodell’, whereby home owners would be charged three to four cents per sqm on the size of the plot and an additional 20 cents per sqm for the home itself, Franke said: ‘Property tax is devoted to financing a community, so any measure needs to be equitable for the people living there. I don’t think there is a simpler option than the one above, taxing so many cents per sqm for the land and the home, so I have hope that this could be implemented.’
An earlier idea that has since lost traction is a land tax closely correlated to the cost of construction, or the Kostenwertmodell. However, Hamburg and Bavaria have rejected such a proposal, saying it would lead to higher land taxes for many inhabitants. ‘Such a tax wouldn’t be fair because new builds would be taxed more heavily than older properties,’ Henger explained.
Others, von Wallis included, would like to see a new model that is broadly based on the existing one: ‘I would personally prefer any system that maintains the fundamental principles of the current system, based on the market value of a property,’ he told REFIRE. ‘Other systems would result in a shift of the tax burden. A lot of the increase in the value of properties since the last evaluation is compensated today by the tax rate applied at local level, which means that people wouldn’t end up paying a lot more land tax if the increase in values was compensated by a corresponding reduction of rates.’
Ultimately, a compromise combining components of several of these models is most likely to filter through. ‘I could imagine a system whereby the land is taxed based on its underlying value but where a flat tax is levied on the home, just based on the number of sqm, rather than its actual value,’ Henger said.
Property values have generally risen most sharply in inner city areas and in suburbs with good transport connections. Subsequently, some owners fear that any new method of assessing the tax could lead to higher payments in cities such as Berlin and Munich where property prices have rocketed in recent years. The government also signalled in its coalition agreement that it is mulling a plan whereby unused properties could be penalized, which could free up land to help tackle Germany’s housing crisis.
The government is supposed to reassess property values every six years but due to the time-intensive nature of such assessments, this has not been happening and many politicians have been clamouring for change in a bid to bring the market up to date. Since Germany formed a GroKo coalition in February,the CDU and SPD has introduced several proposals to boost the country’s housing market, including the introduction of Baukindergeld to the tune of €1,200 per child per year for up to 10 years as an incentive for families to buy their own home, providing their joint income is less than €75,000. In addition, the government is offering an allowance of €15,000 per child.
The government will also update the Mietpreisbremse, or rental brake, law. Dr. Esfandiar Khorrami, a partner at law firm Bottermann Khorrami, told REFIRE that the law is expected to remain but will become formally stricter by strengthening tenants’ rights. The government has said it will update the Mietspiegel (rental cap table) every three years going forward, instead of two years currently, using more scientific data to improve accuracy.
Ministers are due to meet later this week (beginning of May) to discuss the new land tax. ‘I think we should see a proposal from the government within the next two months but as to whether it will become law, I am sceptical because I’m not sure that everyone will be able to agree in time for next year’s deadline,’ von Wallis said.
However, one thing is clear: whatever is decided will have to work across different federal states because according to current rules, and the constitution, it’s not possible for Bundesländer to introduce different land tax systems to each other because this would require a change to the constitution and would have to be pushed through both the Bundesrat and the Bundestag with a 2/3 majority, according to von Wallis. Let’s just hope the new law doesn’t take as long to push through as it took to form the latest coalition government. (ssk)