It has been a long time coming but the German government has finally given the green light to a new Grundsteuer, or land tax law, just weeks before the end of year deadline.
The Bundesrat’s approval of the land tax reforms on 8 November 2019 came just days after reportedly difficult and protracted negotiations in the Bundestag. The new tax will essentially be calculated using a three-step procedure, which is designed to determine the value of the underlying property, in line with the model proposed by the Federal Ministry of Finance. It will come into force on the 1 January 2025.
‘The mechanism of the Grundsteuer is going to mean a fundamental change in terms of how property values will be determined in the future,’ Christian Schede, managing shareholder of law firm Greenberg Traurig Germany and chair of the firm's German Real Estate Sector Group, told REFIRE.
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.
This is the theory, at least. The reality is, of course, far more complex. The SPD has made it clear that they want a value-based model but states such as Bavaria and Saxony have been in favour of a less complex model that wouldn’t penalize their conservative voters who typically have larger plots of land, according to Dr. Konstantin Kortmann, head of residential investment at JLL Germany.
To calculate the Grundbesitzwerte, there are two methods available, according to Schede: 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 can it 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, according to Schede.
Predictably, not everyone is on board: ‘Some Bundesländer (federal states) – notably Bavaria and Saxony - have already said they won’t use the model because they want a simpler version,’ Kortmann said.
Extra clause allows federal states to use different valuation methods
Under the terms of the new Grundsteuer law, there is an Öffnungsklausel, or opening clause, that opens up the gate to other valuation approaches. The aim is to provide leeway so that the states can apply a “base method” which simplifies the valuation method, according to Schede.
However, it may just end up complicating the issue: ‘With this clause, different states can, in practice, use different valuation methods to calculate the land tax,’ Kortmann said. ‘If this happens, it would make it hard to compare land values/taxes across different states. This could result in a development rather similar to the Real Estate Transfer Tax (RETT) model we have in Germany, where states are charging between 3.5% and 6.5% of the purchase price. Also, if this happens, you could potentially have Berlin and Brandenburg charging very different rates, which could make one of them a more attractive place to live than the other. The same issue could arise in other parts of the country, too.’
Risk of federal states upping land tax
It’s easy to see why the German government is intent on trying to get this right: It raises €14bn per year from land tax, making it the most important tax for the municipalities, according to Kortmann: ‘There will be a clear temptation to work with it and to charge more, especially if the government changes the law so that landlords pay it rather than their tenants,’ he said.
Despite the fact that it is levied by the municipalities, land tax, like Nebenkosten (ancillary costs, such as electricity), is something that has to be decided on at federal level regarding its legal framework and calculation methodology – and this is about to change, according to Kortmann. ‘I don’t think the current government will expect landlords to pay it but an SPD/Linke/Grüne coalition could try and shift the burden to landlords and away from the tenants,’ he said. ‘In the short-term, landlords would then just have to pay it, although in the long-term they would just work it into the overall costs for the tenant.’
Land tax is the German government’s third largest source of income. However, the system is in urgent need of a shake up, a fact that is recognized by the Federal Constitutional Court which gave the government until the end of this year come up with a system that no longer relies on outdated criteria.
What will the new valuation model mean for homeowners and renters? Renters already pay the land tax, albeit indirectly, via their Nebenkosten. The average land tax in 2016 was €390 a year, according to the Cologne Institute for Economic Research (IW).
‘We’ll have to wait and see what happens,’ Kortmann said. ‘Some states could decide to increase land tax by 200%. It could be messy. I think the government needs to keep a certain level of simplicity,’ he warned.
The political aim is that the new Grundsteuer should be neutral – overall – and that municipalities should not raise more capital that way than before, according to Schede: ‘It’s been such a lengthy legislative process, so we’ve expected the likely result for months,’ he said. ‘It’s hard to say if land tax will increase as a result or not. More generally, the challenging issue going forward will be how to avoid overly increasing tax burdens that impact on either the tenants or the landlords. Political decision makers will have to be considerate of the fact that – in particular in the residential sector – increasing costs of construction and operating multi-family buildings will be counter-productive to increasing supply in affordable housing. Any potential extra tax burden needs to be considered carefully, also with a view to ever tighter rent control regimes.’
Land Tax “C” will come into force
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 asses land tax “C” on building land and cases involving special housing needs but also, where there other urban planning reasons, according to PwC.
‘Land tax “C” will give local municipalities the right to determine special - higher- multipliers for undeveloped and unoccupied buildings to encourage property owners to actually exploit the property,’ Schede said.
Herculean re-evaluation on the cards
For now, the German government has a Herculean task on its hands if it is to revaluate the value of around 36 million plots of land across the country in time. After the initial evaluation on 1 January 2022, land will be revalued every seven years. Taxpayers will also be subjected to a fresh burden: landowners will be obliged to file a simplified declaration by the beginning of the following calendar year, if there has been a change in the actual circumstances which would affect the value or the type of property. In the event of non-compliance or failure to comply with the obligation to declare and notify in a timely manner, a late filing penalty may be charged.
Ultimately, the German government could not shy away from introducing a land tax law based on values that are up-to-date. However, the real question will be to what extent the federal states choose to diverge from it and introduce their own calculation methods. If many of them decide to do that, it could be about to get very messy indeed.
