Frequently Asked Questions
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What are some reasons to invest in Berlin?
- Since the withdrawal of the United Kingdom (UK) from the European Union, many big corporations started moving their Headquarters to Berlin.
- No restrictions for foreign investors!
- Very low-Interest rates on mortgages
- Increasing demand for properties led to a high increase in value and rents!
- Taxation benefits for individuals and companies!
- Warranty rights for buyers in new buildings!
- Less expensive but much higher quality of life compared to other European cities!
- No university fees for local, as well as, international students!
Are there any restrictions for foreign investors?
Unlike in other countries, such as Denmark and Switzerland, there are no restrictions for foreigners to purchase real estate in Germany. Currently, many foreign purchasers acquire properties in large German cities. Clients interested in buying a house or an apartment in Germany can get in touch for initial guidance on how to proceed when purchasing real estate in Germany.
As an initial remark, any and all property purchase contracts must be signed at a German notary. At Bonema we speak English and support you through the whole process.
Warrenty rights for buyers
It is important to highlight that for used properties sellers provide only minimal warranties. In contrast, newly built properties, such as condominium are sold with vast warranty rights for the buyer. Particular caution must be applied when acquiring properties which are currently rented out. German tenancy law provides tenants with a high degree of protection. However, once the property is acquired the new owner may evict the tenant provided that he or a close relative wishes to use the property.
The purchaser is usually protected by a so-called priority notice. This priority notice protects the buyer from unexpected sales activities, such as selling the property to a different buyer for a higher price.
Payment, escrow account
The purchase price is either paid directly to the seller or placed on an escrow account administered by the acting notary. However, the latter option triggers additional costs and in most cases is not required to protect the purchaser’s interest.
The buyer’s interests are adequately protected even without an escrow account as the purchase price only falls due once a priority notice appears in the public land register. In a simplified manner one can say that from that moment onwards, the seller cannot obstruct the purchaser’s acquisition of good title.
Tax and fees when purchasing Real Estate
Tax and fees
Buying a property triggers a real estate transfer tax. Each federal state in Germany applies its own tax rate. The tax rate is between 3.5 and 6.5 %. Registration as a new legal owner of a property may take up to 3 or 4 months
in Germany. The purchaser is only registered as the legal owner of the property once real estate transfer tax has duly been paid. Real estate deals trigger considerable ancillary costs.
For instance: A condominium in Berlin is purchased at a price of EUR 500.000. The purchase price will be transferred via the notary’s escrow account. A broker is involved. Following Taxes and Fees will apply:
- Notary fees: approx. 7.500 EUR (1,5%)
- Land register fees: approx. 2.500 EUR (0,5%)
- Broker fee: 17.850 EUR (3,57% including value-added tax)
- Real estate transfer tax: 30.000 EUR (6%)
In case a number of properties are acquired or shall be acquired successively, it is advisable in view of tax optimization potential to consider an acquisition via a property holding company (PropCo). If certain preconditions are met, real estate transfer tax can be avoided entirely (RETT-blocker).
Further, a PropCo can facilitate access to bank financing for foreign purchasers which are residents in countries outside the Euro Zone and therefore barred from access to bank financing. In this case, the PropCo itself, a regular German limited liability company, will act as a borrower.
Bonema advises foreign clients at the time of acquiring real estate in Germany. In particular, we frequently advise foreign clients when purchasing up-scale apartments in metropolitan areas across Germany. If required, our partner law firms can provide real estate related tax advice. Our clients appreciate our hassle-free and hand-on advice and instructions throughout the entire purchase process.
What is the Land Register?
Legal ownership is acquired upon registration in the local land register. The land register is a public registry operated by the respective local court. For each property, a separate land register folio exists. The folio displays the identity of the owner, the size and location of the property, restrictions on the use of the property or encumbrances. The land register may be accessed by the general public. Yet, a person interested in reviewing a land register folio must demonstrate a legitimate interest (e.g. interest in the purchase of the property) in order to be granted access to the register. Purchasers should always examine up-to-date extracts from the land register prior to the acquisition of a property. Other Public Registers Other real estate-related public registers exist. When acquiring real estate which is located on former industrial sites, the register for polluted areas (Altlastenregister) should be consulted. Further, the register for public charges (Baulastenverzeichnis), i.e. obligations towards the competent building authority, should be consulted.
Property purchase contracts must be concluded before a German notary. Yet, the parties must not necessarily appear in person but may authorize a representative by way of a written power of attorney. Please note that this power of attorney must be certified either by a German notary, a German consular officer or a foreign notary. In the latter case, the power of attorney must be attached with an apostille. The notary serves as an independent party throughout the purchase process and liaises with involved public authorities such as the land register and the tax office. A notarial escrow account may also be used in order to balance out the parties’ respective risks. A property purchase contract typically contains the following provisions:
the obligation to sell and purchase;
seller’s declaration of conveyance of title to the purchaser
preconditions to maturity of the purchase price;
transfer of benefits and burdens (Nutzen- und Lastenwechsel);
liability for defects as to quality and title;
power of attorney for a purchaser for encumbrance of property in order to obtain mortgage financing
Once the land registry receives the application for transfer of title it examines whether certain formal requirements have been fulfilled. Such requirements include the presentation of a certificate of non- objection of the competent tax office, i.e. confirmation that real estate transfer tax has been paid.
The registration of the transfer of title can take up to several months. Theoretically, the purchaser could validly transfer the property to a (higher-bidding) third party. No purchaser will accept this uncertainty. Therefore, typically, the seller grants a priority notice (Vormerkung) in favour of the purchaser. The priority notice will be registered in the land register immediately after the notary’s appointment. The priority notice protects the purchaser as no third party may validly acquire good title to the property as long as such a priority notice is registered in the land register.
Taxation for Individuals
Individuals being domiciled or resident in Germany are subject to German income tax. This includes the taxation of real estate income (rental income and capital gains from the disposal of real estate). Most double taxation treaties entered into with Germany provide for taxation of real estate income in the jurisdiction where the real estate is located. Therefore, individuals being neither domiciled nor resident in Germany are subject to German income tax with income from real estate located in Germany. Income tax rates range from 14 % to 42 %. Income equal or in excess of EUR 52,882.00 is taxed at a rate of 42 %. Any income in excess of EUR 250,731.00 is subject to a tax rate of 45 %. In addition, a solidarity surcharge (Solidaritätszuschlag) at a rate of 5.5% of the respective income tax liability is levied.
Capital gains deriving from the sale of real estate are tax exempted if
1. the property was held for more than 10 years and 2. the property does not qualify as a business asset.
A property is regarded as a business asset if the taxpayer qualifies as a real estate trader. As a basic rule, an individual is deemed a real estate trader if it sells more than three properties within a period of five years.
Dividends which are distributed to individuals are subject to withholding tax (Abgeltungssteuer) of 25 % plus a solidarity surcharge of 5.5% of the tax liability, i.e., at effectively 26.375 %. Withholding tax is retained by the debtor of the dividend and then paid to the tax office. This applies also for shareholders residing abroad. However, foreign shareholders may benefit from a lower withholding tax rate depending from the respective double taxation agreement.
Proceeds from the sale of a property which qualifies as a business asset (see above) or from the sale of shares in a property owning company may a tax exemption of 40 % (partial-income rule) if certain conditions are met.
Taxation of Companies
German companies are liable to German corporate tax (Körperschaftssteuer). Corporate tax is levied at a rate of 15% on the tax base plus a solidarity surcharge of 5.5% of the corporation tax liability, i.e., at 15.825% in total. Taxation is enforced irrespective of whether profits are distributed or not. This also applies to foreign companies having their seat of management in Germany. Foreign companies not having their seat of
management in Germany are subject to German corporation tax provided they generate, inter alia, income from real estate located in Germany.
Dividends from a German company or a foreign corporation with its seat of management located in Germany are subject to withholding tax at 25%. A foreign corporate shareholder can benefit from a reduction of the withholding tax rate down to:
an even lower rate in the case of a respective double taxation treaty, which provides for a further reduction,
or even zero, if the requirements of the respective EU directive are met.
Shareholding companies enjoy an exemption of 95% (effective corporation tax rate = 0.8%) provided they have a minimum shareholding of 10 % in the subsidiary.
Tool for tax-efficient exit: Purchase of a German real estate holding company via a corporate vehicle and benefit from the 95% exemption from capital gains...
Real Estate Tax
Real estate tax (Grundsteuer) is assessed annually on 1 January and based on a property’s value. The applicable tax rate may vary between different cities in Germany. The real estate tax rate ranges from 0.8% to 2.8% of the tax base, depending on the location of the property. The average effective tax rate across Germany is approx. 1.5%. The real estate tax can be used as a tax-deductible expense for income, corporation and trade tax purposes.
WHAT IS GERMANY’S INTERNATIONAL CREDIT RATING?
As reported by the three major credit rating agencies: Standard & Poor's, Fitch, and Moody's, Germany have an AAA credit rating with a stable outlook. This is the highest possible rating a country can get.
WHAT IS BERLIN’S POLITICAL AND LEGAL SYSTEM?
Germany is a democratic, federal parliamentary republic, and federal legislative power is vested in the Bundestag (the parliament of Germany) and the Bundesrat (the representative body of the Länder, Germany's regional states).
The multi-party system has, since 1949, been dominated by the Christian Democratic Union (CDU) and the Social Democratic Party of Germany (SPD). The judiciary of Germany is independent of the executive and the legislature, while it is common for leading members of the executive to be a member of the legislature, as well.
The political system is laid out in the 1949 constitution, the Grundgesetz (Basic Law), which remained in effect with minor amendments after German reunification in 1990. The constitution emphasizes the protection of individual liberty in an extensive catalog of human and civil rights and divides powers both between the federal and state levels and between the legislative, executive, and judicial branches.
West Germany was a founding member of the European Community in 1958, which became the EU in 1993. It is part of the Schengen Area and has been a member of the eurozone since 1999. It is a member of the United Nations, NATO, the G8, the G20 and the OECD.
The Economist Intelligence Unit has rated Germany as "full democracy" in 2017.
WHAT ARE OTHER REASONS FOR INVESTING IN GERMANY?
At the center of Europe
Germany's central location within Europe gives investors access to the entire market of the European Union as well as the markets of Central and Eastern Europe.
The most important market in Europe
With the highest GNP and the largest population in the European Union, Germany is Europe's most important market.
The leader in growth industries
Germany is a leader in modern information and communications technologies and boasts an infrastructure that is virtually without parallel in the European Union.
Services for investors
Germany offers investors efficient and unbureaucratic support for their plans to establish new locations here. The organizations charged with administering economic development assistance offer robust support and help companies search for locations, recruit personnel, and secure funding.
Advantages of doing business in Germany
Germany is becoming increasingly attractive as a location for business in international comparison. The restructuring of the East German economy according to market principles has created a new dynamic nature and innovative spirit.
Germany has become the center of Europe. As an economically important member state of the European Union, Germany stands for innovation, advanced technologies, and high levels of productivity.
The political system of the Federal Republic of Germany.
Long-term stability and the ability to plan ahead are important factors when deciding whether to invest or pursue other economic engagement in a given region. Germany has a state infrastructure that functions extremely well while ensuring social order and creating a level playing field across the entire country.
The social welfare system of the Federal Republic of Germany
Guaranteeing the welfare of individuals is a primary focus of the German political system. Social security is fundamental to a high quality of life. The welfare state is based on the principles of solidarity and individual responsibility. Germany's social safety is based on a network of laws in all of the states designed to provide security for individuals in case of sickness, disability, and old age as well as policies that provide allowances for dependent children and housing.
Associations and interest groups in Germany.
After the Federal Government relocated from Bonn to Berlin, many large German associations have followed suit by moving their headquarters to the new capital on the Spree. As the seat of the Federal Government and many of the country's most important industry and trade groups, Berlin is a political and economic center in Germany.
Federal and state taxes
The taxes collected by the state allow it to fulfill its responsibility of promoting the public good in fields such as social welfare, education, infrastructure, and healthcare. Accordingly, the measures taken under tax policy contribute to the promotion of investment and improving Germany's competitiveness in the global economy.
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