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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Court which has given the government until the end of this year come up with a system that no longer relies on outdated criteria.
The German government is in the final throes of agreeing on a new Grundsteuer, or land tax law, in a move that could end more than a year of political wrangling.
On 1 February, the Federal Minister of Finance, Olaf Scholz, and the Ministers of Finance of the German Federal States published a new proposal for the Grundsteuer-Reform, which is now subject to debate. The latest proposal is a compromise based on various proposals touted last year, according to Georg von Wallis, head of tax at law firm Greenberg Traurig in Berlin.
‘Under the terms of the new proposal, the value of the property would be determined by an artificial rental income based on a statistical survey and split into six categories, from the lowest rent to the highest,’ von Wallis told REFIRE. ‘The proposal provides for a flexibility clause allowing for a certain adjustment in case the actual rental income is lower than the artificial rental income. In addition, the land tax would be calculated based on the value of the land, broadly speaking, based on the list of purchase prices for land as documented by various municipalities. Furthermore, the age of the building will be taken into consideration for the calculation.’
However, the quality of data can vary in different municipalities, which could result in unfair taxation, according to von Wallis. The previous idea of a Südländermodell - which was proposed by the states of Bavaria, Baden-Württemberg and Hessen - 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 - is no longer on the table.
The politically complicated issue is that the German municipalities benefit from the land tax but the Federal Parliament is in charge of the law that the states have the burden of implementing, according to von Wallis.
‘The idea of basing the land tax on the potential rental value of a home as well as the value of the underlying land makes sense because the two values are closely related,’ Konstantin Kortmann, head of residential investment at JLL Germany, told REFIRE.
The above criteria apply to residential properties. For commercial properties and properties with a mixed use it is often difficult to determine the adequate artificial rental income (based on rental payments for comparable commercial properties), so in this case they are proposing applying different criteria not dissimilar to the ones they use now, according to von Wallis. The so-called Sachwertverfahren include basing the land value on the cost of construction, which will normally result in higher values, he said. There are different criteria for agricultural and forest land.
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.
So what does this mean for homeowners and renters? Renters already pay the land tax, albeit indirectly, via their Nebenkosten, or ancilliary costs. The average land tax in 2016 was €390 a year, according to the Cologne Institute for Economic Research (IW).
‘While German municipalities have said that the Grundsteuer won’t increase for most people, I’m not sure if I believe it,’ Kortmann said. ‘They have an interest in increasing their tax revenue and if the current tax values are very outdated in some areas, it’s completely possible that land tax could increase by three or four times for some people.’
Whatever happens, the whole process will be so complicated that the underlying criteria need to be kept simple. Part of the problem is discrepancies in different places. For example, land values in eastern Germany are based on values from 1935, whereas in the west, values are used from 1964, according to Kortmann. ‘Similarly, the role of some regions has changed a lot in that time. In the 1960s, the Ruhr region was the economic heartbeat, which is no longer the case. Bavaria back then was quite rural, whereas Munich is an important economic hub today,’ he added.
For politicians, it has been a long – and heated – journey towards an improved land tax model, following Germany’s Constitutional Court ruling last year that the country’s Grundsteuer is obsolete.
Even now, politicians are still not in agreement as to how the Grundsteuershould be calculated. The Mayor of Düsseldorf, Thomas Geisel (SPD) has criticized the new proposal. Speaking to the Westdeutsche Zeitung he said: ‘I have the impression even after this compromise that we could still have a constructive discussion about simplifying it – and I’m not the only one.’ Geisel dismissed the idea of basing the new Grundsteuer on the potential rental income, age of property and land value. ‘That would be complicated and a job creation scheme for the taxman,’ he said. ‘It would be far more practical just to base it on the value of the land. After all, the value of a property is implicitly tied up in the value of the land.’
The next step is to turn the proposal into an amendment to the law and to introduce it to the Federal Parliament as soon as possible, likely before the summer, according to von Wallis. It then needs to be approved by the Bundesrat but, assuming they agree, it could be passed into law over the summer. However, because the values of homes will have to be re-evaluated, it could take two years until people have to start paying land tax based on the new criteria.
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.
So what lies ahead? Many in the industry expect the latest proposal to be passed into law later this year. ‘I am pretty confident that a Grundsteuer amendment will pass this year but I do think it will be messy to implement,’ Kortmann said. ‘The new proposal, if it passes, could be very difficult to implement because the value of homes will have to be re-evaluated. It has been estimated that 2,500 full-time new workers would be needed to do this.’
While the Bavarian government has been blocking the new proposal, von Wallis doesn’t think they’ll oppose it in the end because if the government can’t enact a new Grundsteuer law by the end of this year, land tax will cease to exist – and so will the money it generates. ’Hence, there is pressure to introduce an amendment to it, otherwise the municipalities would suffer without the income. My personal expectation is that this new resolution will be passed into law, even if it doesn’t end the debate,’ he said. (ssk)
