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Grunderwerbssteuer
Lower Saxony is raising its rate from 4.5% to 5%, while even the state of Hesse, which hiked its rate last year from 3.5% to 5%, is set to vault up to 6% in 2015.
Investors in German real estate in the northern federal states of Berlin, Schleswig-Holstein, Bremen and Lower Saxony will have to brace themselves for a further increase in the Grunderwerbssteuer, or property transfer tax, a sort of stamp duty imposed on property purchases.
Heading the upward surge is Schleswig-Holstein which has raised its rate to 6.5%. Berlin has raised its rate to 6% after a raise to 5% as recently as April last year. Lower Saxony is raising its rate from 4.5% to 5%, while even the state of Hesse, which hiked its rate last year from 3.5% to 5%, is set to vault up to 6% in 2015.
The issue of the property transfer tax has become a hot potato in German state politics. Until the federal reforms of 2006 the rate was a uniform 3.5% nationwide, (and a mere 2% until 1996) since when the setting of the rate was decentralised and left up to the discretion of the sixteen state parliaments. With such a lucrative source of taxation in their gift, politicians have been unable to resist what is now becoming an upwards spiral to raise as much from this source as possible. Only Bavaria and Saxony in the east have maintained their rate at 3.5%, although Green politicians in Dresden in Saxony have been pushing – so far unsuccessfully – for a increase in the rate.
The €7.4bn raised in property transfer tax in 2012 made up fully half of all the pure Länder taxes raised that year, up from €5.3bn two years before. Along with federal subsidies, the nation’s municipalities benefited to the tune of €10.3bn in 2012 from the property tax alone.
An anomaly in Germany’s Länderfinanzausgleich, the system of financial equalisation between the Federal Government in Berlin and the Länder, seems in a perverse way to be actually encouraging the Länder to raise their rates. Lowering the rates would require the Länder to top up their own deficits, while the extra revenue raised from higher rates remains in the kitty without negatively affecting the state’s obligations to pay back in to the community pot. Those states not raising their rates have their tax take assessed as if the rate were higher – with the net effect being that states are tempted to join the upward race.
Jens-Ulrich Kiessling, the president of the German Property Association IVD (Immobilienverband Deutschland) has been a vocal critic of the existing system, saying it is socially and economically unacceptable and highly detrimental to the official German goal of raising the home ownership rate across the nation. “Instead of competing to offer lower tax rates, we’ve got a race to see who can raise them higher, faster.” The IVD is seeking to have the rate-setting returned to the federal government or at least to have a cap imposed on the Länder by federal decree. Investors would be scared away, and the higher taxes raise the cost of housing, which in turn feed through to higher rents.
Germany has also long been battling with notions of how to reform another basic tax – that of the plain vanilla property tax. This tax, levied on 35m properties in Germany and which every property owner is obliged to pay, is assessed and charged in a myriad of different ways, depending on factors such as location, size of property, current valuation, type of use, or other criteria. Revenues from the tax flow to the municipalities and the Länder, rather than the federal government, hence the ongoing inability to find common ground for a more uniform taxation policy.
For example, properties in the east are assessed using different valuation criteria to those in the west for legacy reasons, leading among other differences to skewed valuations in the larger cities. As landlords typically pass the quarterly tax on to tenants, the higher valuations of properties in the larger cities will translate into higher rents – again hindering the efforts of local politicians to keep a lid on private rent levels. Germany’s Supreme Tax Court has been pushing for urgent reform of the basic property tax, warning that any further delays would be in breach of the country’s very constitution. Dealing with the issue is likely to become much more pressing in Berlin over the coming months.
