Tax changes 2024 / 2025 for the real estate industry

I. Annual Tax Act 2024

Despite the failure of the traffic light coalition, the Bundesrat approved the Annual Tax Act 2024 (JStG 2024) at its meeting on 22 November 2024. The law will generally come into force one day after its promulgation on 2 December 2024 and contains a large number of tax changes in various areas of German tax law. It also includes the following changes, which are of great importance for the real estate industry.

1. Abolition of the fictitious second property in real estate transfer tax law

• In the identical decrees of 16 October 2023, the German tax authorities stipulated that a property can be attributed not only to the company that acquired it directly, but also, under certain conditions, to a second legal entity that directly or indirectly acquired the shares in the real estate company. As a result, real estate transfer tax can be triggered twice in the case of share transfers at different levels of the shareholder chain. This view is extremely controversial and possibly unconstitutional.
• The introduction of a new para. 4a in § 1 GrEStG is intended to mean that a merger of shares within the meaning of § 1(3) or (3a) GrEStG no longer leads to the property belonging to the assets of the share acquirer. This excludes the dual affiliation of real estate to the assets of two companies.
• The new attribution rule applies for the first time to acquisitions pursuant to section 1 (2a) to (3a) of the Real Estate Transfer Tax Act that are carried out after 2 December 2024.

2. Transfer of book value of assets between partnerships with identical shareholdings

• The introduction of a new no. 4 in § 6.5 sentence 3 of the Income Tax Act enables the transfer of assets between partnerships with identical shareholdings at book value.
• According to the explanatory memorandum to the law, there is no identity of participation if a person is only involved in one of the two co-entrepreneurships. Participation as a trustee is also said to be harmful. Zero percent shareholdings, e.g. of a general partner, should be harmless.
• The new regulation applies to all open cases and thus covers past, current and future transfers. However, at the joint request of the co-entrepreneurs, the new rules are not to be applied to transfers before 12 January 2024.

3. Income tax exemption for income from photovoltaic systems

• The tax exemption for income from the operation of small photovoltaic systems installed on buildings will apply to photovoltaic systems purchased, commissioned or expanded after 31 December 2024 up to 30 kW (peak) per residential or commercial unit (previously 15 kW). However, the total amount remains at a maximum of 100 kW (peak) per taxpayer or co-entrepreneur.
• According to the explanatory memorandum to the government draft, the new version is also intended to clarify that the maximum values have the effect of an exemption limit and not an exemption amount.

4. Trade tax liability of passive permanent establishment income

• Income accruing in a foreign permanent establishment that would be taxable under the rules of CFC taxation if that permanent establishment were a foreign company within the meaning of these provisions shall be deemed to have been earned in a domestic permanent establishment.
• The new regulation on the trade tax liability of passive permanent establishment income is also to apply to assessment periods before 2024

5. Introduction of non-profit housing

• Corporations that commit to permanently low rents will be recognized as non-profit again from January 1, 2025.
• In order to be recognized as a non-profit organization, rents must remain permanently below the market rent and apartments must be allocated to people whose income is no more than five times – or six times for single persons and single parents – of the basic income. This includes around 60% of all households in Germany.
• The need for assistance must exist at the beginning of the respective tenancy.
• Whether the rent is below the market rent must be checked at the beginning of the tenancy and in the event of rent increases.

6. Surcharge for non-submission or the submission of substantially unusable records

• If taxpayers submit the transfer pricing documentation late or not at all, or if the records submitted on a business transaction are essentially unusable, a surcharge must be imposed in each case. If, after completion of the field audit, a surcharge is determined for the non-submission or the submission of essentially unusable records, previously determined surcharges for late submission after 31 December 2024 are to be credited.
• This change is particularly relevant for the stricter documentation requirements that apply to tax audits announced from 1 January 2025. In such cases, the transfer pricing documentation must be submitted within 30 days of the announcement of a tax audit, without the need to explicitly request it.

II. Other legislative projects

In addition to the Annual Tax Act 2024, there are currently about 20 other tax bills or ordinances, but none of them have yet been passed by the Bundestag. After the “traffic light phase-out”, it can be assumed that these legislative projects will no longer be implemented.

However, on 13 December 2024, the parliamentary groups of the former traffic light surprisingly agreed on the implementation of selected measures from the Act on the Further Development of Tax Law and the Adjustment of the Income Tax Tariff (Tax Development Act) before the early Bundestag election on 23 February 2025. According to reports, the reduced Tax Development Act is essentially only to include an increase in the basic tax-free allowance, the tax-free child allowance and child benefit from 2025. Highly controversial measures such as the introduction of a national notification obligation for tax arrangements are not part of this agreement.

No further tax legislative projects are expected until 23 February 2025. Even after that, it will take several months before a government is formed and new legislative projects are initiated or old legislative projects are reactivated. Particularly relevant for the real estate industry is the question of whether the new government will take up the proposal of the expert commission “Simplified Corporate Tax” to abolish the simple and extended reduction for real estate companies.

III. Future court decisions

Significant tax innovations can be triggered not only by legal changes, but also by court decisions. The following two procedures that could trigger a tax earthquake should be highlighted here.

1. Constitutionality of the interest barrier

• The interest barrier limits the tax deduction of interest expenses, even if they are actually incurred and paid to third parties such as banks. This limit means that taxpayers have to pay taxes on profits that they do not actually make. Since the introduction of the interest barrier, there has therefore been a discussion as to whether the regulation is constitutionally permissible.
• In its decision of 14 October 2015, I R 20/15, Federal Tax Gazette II 2017, p. 1240, the Federal Fiscal Court (BFH) suspended pending proceedings in which this question is material to the decision and referred the question to the Federal Constitutional Court (case no. 2 BvL 1/16) as to whether the interest barrier violates Article 3 of the Basic Law, as the Federal Fiscal Court is convinced that the provision is unconstitutional.

2. EU conformity of real estate transfer tax in the case of restructuring

• The EU Directive 2008/7/EC (Capital Transaction Tax Directive) prohibits any kind of indirect taxes or levies on corporate law transactions such as mergers, demergers or capital injections. The Directive is directly applicable law in Germany and must be observed by the administration and the national courts.
• In the proceedings pending before the Federal Fiscal Court since 2023 under II R 8/23, the plaintiff invokes this directive and demands a comprehensive exemption of restructuring from real estate transfer tax that goes far beyond the group clause under section 6a of the Real Estate Transfer Tax Act.

IV. Need for tax action at the turn of the year

Regardless of changes in the law and case law, there is a considerable need for taxpayers to take tax action at the turn of the year. Examples of this are:

1. Optimization of the interest barrier: Check whether the equity ratio is being met and, if not, whether this can still be achieved by increasing equity before the end of the year.
2. Increase in loss deduction for limited partners: If necessary, equity increase before the end of the year in order to be able to take advantage of losses that exceed the current equity.
3. Extended trade tax reduction: The conditions for the extended reduction must be met throughout the year. It should therefore be checked whether the requirements are met from 1 January 2025 or whether measures are still necessary until the end of the year.
4. Tax prepayments: If profits fall, an application can be made for a reduction of the advance payments.
5. Formation of tax-free reserves: In the case of capital gains, it can be checked whether hidden reserves can be transferred to other assets or whether tax-free reserves can be formed in accordance with Section 6b of the Income Tax Act.
6. Country-by-Country Reporting: The deadline for submitting the reports in accordance with § 138a AO expires on 31 December 2024 (if financial year = calendar year).

If you would like to read more, the “Key Tax Issues at Year End for Real Estate Investors” provides an overview of key tax options and deadlines for the turn of the year in Germany and in 35 other countries worldwide. The 2024/2025 edition can be found under www.pwc.com/KTI.