Real properties in Germany Making an investment

 

Questions

1) What is the legislation in the German tenancy law (preconditions for contracts, time and costs for clearance…)?

2) Achievable return (apartment complex or commercial property)?

3) Land acquisition tax and other expenses you have to pay if you buy a property

4) Annual taxes on real property?

5) Have taxes for rental incomes to be paid if the incomes are generated by a foreign private person or company?

6) What is better: Buying and holding real properties as a private person or as a limited company?

7) Costs for foundation of a limited company? Where can be its residence? Costs for administration, management etc. Tax and costs for the auditor?

8) What are the differences if the company is founded in an foreign country?

9) Costs for administration / management of the real property?

10) Costs for a real property agency and costs for legal advice?

Answers

1) What is the legislation in the German tenancy law (preconditions for contracts, time and costs for clearance…)?

a) Acquisition contracts

Under the German law there are formal preconditions if you want to buy a real property. Generally one has to differ between the acquisition contract and the contract with which the property is transferred to the new property owner. This “principle of separation” is a fundamental principal of the German civil law. When the sales contract is closed, an official recording by notary public is necessary (§ 311b I 1 BGB ). When the property is transferred, also for this contract an official recording by notary public is obligatory (§ 925 I 1 BGB). In praxis both contracts are closed simultaneously, so only one visit of a notary is necessary.

The transfer of the real property is fulfilled when the new property owner is entered in the land register.

b) tenancy contracts

One has to differ between residential tenancies and industrial premises. Generally speaking a written contract is not obligatory but strongly recommended. Regarding contracts about a residential tenancy normally it is allowed to close a contract with a fixed-time lease only if some special preconditions are fulfilled or if there are special reasons (575 BGB). If a lease agreement for a longer period of time than one year is not entered into in written form, then it applies for an indefinite period of time. However, termination is only allowed at the earliest at the end of one year after use of the residential space has been permitted (550 BGB). Furthermore in most cases it is only possible to terminate a contract about residential tenancy if the preconditions written in 573 BGB are fulfilled. Also the possibilities to raise the tenancy are very restricted.
As a consequence the time and costs for clearance are different. Generally speaking, a clearance of a residential tenancy takes more time than a clearance of an industrial premise. “The lessee may object to the notice of termination of the lessor and demand continuation of the lease from the latter if termination of the lease would be, for the lessee, his family or another member of his household, a hardship that is not justifiable even considering the justified interests of the lessor. This does not apply if a reason exists that entitles the lessor to terminate the lease for cause without notice. Hardship also exists if appropriate substitute residential space cannot be procured on reasonable terms.” (574 BGB)
Taking all this into account you have to calculate an average period of 12 months from the beginning of the problem with the tenant until final clearance. But it also depends on the judicial circuit and if there is a capacity overload at the responsible court. At some courts a clearance can be finished within two months, at other courts it can last two years.

Regarding the costs for a clearance there are several costs that arise, for which the landlord takes the financial risk if the tenant is not able to pay. The costs depend on the tenancy. Following you find an example about all costs that arose to clear a three room apartment, situated in Munich, with 90 sq m living space, 850 EUR tenancy + 150 EUR incidental expenses for operating and heating costs:

The proceedings lasted seven month. 876,73 Euro costs for legal advice arose because of the correspondence of the attorney regarding the termination of the contract. As the tenant didn’t react, a suit was filed immediately. For the clearing proceedings the landlord had to pay in advance 1963,84 EUR legal costs and court fees After seven month the enforceable judgement for clearance was executed. The fee for the bailiff was 169,80 EUR, the cost for installing a new lock ca. 200 EUR, the costs for the removal firm 4300 EUR. Additionally the landlord had to pay 7510,37 EUR proceedings fees and 6000 EUR renovating costs.
If you add the stoppage of the tenancy for four month (4000 EUR) – because the lessor has already retained a bailment of 3000 EUR – the landlord has to pay more than 17.000 EUR in all. Theoretically the landlord gets this money back from the tenant. But if the tenant has no money, the landlord has to cover the costs alone.

2) Achievable return (apartment complex or commercial property)?
The return depends on the region where you buy houses or apartments. The highest profit rate have apartments in Berlin, the lowest return have apartments in the Ruhr district.
Following you find the profit rate for apartments in several German cities and regions in 2009 (based on the netto cash-flow and the accretion):
Total return of German apartment complexes according to several regions 2009
Cities Total Return Current income Income because of change in value
Hamburg 2,9 % 3,1 % -0,2 %
Hannover 3,4 % 4,2 % -0,7 %
Berlin 9,1 % 5,7 % 3,2 %
Ruhrgebiet -3,5 % 4,2 % -7,5 %
Rheinland 3,0 % 4,3 % -1,3 %
Rhein-Main 5,9 % 4,3 % 1,5 %
Rhein-Neckar 6,1 % 4,0 % 2,0 %
Stuttgart 5,1 % 4,2 % 0,8 %
München 6,2 % 3,7 % 2,5 %
Sonstige 4,3 % 4,9 % -0,5 %

This positive development continued in 2010. The average total return (before taxation and financing) was 5,1%. The biggest total return was again in Berlin with 6,2%, followed by Hamburg with 5,7% and the Rhine-Neckar district (Heidelberg,. Mannheim,…) with 5,4%. Also in 2010 there were significant differences regarding the change in value (Munich +1,8%, Rhine-Neckar +1,1%, Rhine-Main -0,1%, Ruhr district -0,3%, Hannover -0,6%, Rheinland -0,8%, Stuttgart -2,3%).
This calculation took dates of more than 2400 apartment complexes of institutional investors with a trade value of more than 5.9 billion EUR into account.

Also in 2011 the positive development continued. The highest total return could be generated with apartment complexes (7,8%), followed by industry complexes (7,0%), commerce complexes (6,1%) and office properties (4,3%). The change in value of apartment complexes was 3,2%, the netto cash flow 4,5%.
Summarizing one can state that apartment complexes are the most lucrative type of real property investments. The most lucrative market for investments is Berlin, followed by Munich.
But there is the expectation that the risk, not to find a tenant will grow within the next few years. The following chart shows the expected risk not to find a yenant in selected Geman cities. The chart shows that the lowest risk is in Hamburg, the highest risk in Leipzig.

3) Land acquisition tax and other expenses you have to pay if you buy a property

a) Land acquisition tax

If you buy a real property which is situated in Germany, you have to pay a certain percentage as land acquisition tax. The land acquisition tax has to be paid on the property and the building, which is situated on this property. The fundamental provisions are stated in the “Grunderwerbssteuergesetz” (GrEStG). The tax duty arises when the acquisition contract about a real property is closed. Both parties – buyer and seller – are liable as joint debt (§ 13 GrEStG). The tax office first turns to the party which agreed to pay this tax – normally the buyer. But if the buyer doesn’t pay, the tax office turns to the seller, and the seller has to pay the land acquisition tax – no matter what buyer and seller have contracted. The percentage of the land acquisition tax differs from “Land” to “Land”. The following chart shows the different tax rate in the different German “Länder”:

Bundesland Percentage Source
Baden-Württemberg 5,0 % [10] Bayern 3,5 %
Berlin 5,0 % [12] Brandenburg 5,0 % [13] Bremen 4,5 % [14] Hamburg 4,5 % [15] Hessen 5,0 % [16] Mecklenburg-Vorpommern 5,0 % [17] Niedersachsen 4,5 % [18] Nordrhein-Westfalen 5,0 % [19] Rheinland-Pfalz 5,0 % [20] Saarland 5,5 % [22] Sachsen 3,5 %
Sachsen-Anhalt 5,0 % [23] Schleswig-Holstein 5,0 % [24] Thüringen 5,0 %

b) Other expenses

Furthermore there are other expenses that arise buying a real property. As mentioned above in the legal section, an official recording by notary public is necessary
when the acquisition contract and the contract with which the property is transferred to the new property owner are closed. This causes expenses. Furthermore there are expenses you have to spend for entering the new owner in the land register, because this is also an obligatory precondition for transferring a real property from the old to the new owner. If the bank is also involved in financing the real property, the bank often asks for a mortgage. If it is so, an official recording by notary public is obligatory also for this mortgage contract.
As rule of thumb you can calculate 1% acquisition costs as notary fee and 0,5% of the acquisition costs as fee for entering the transfer in the land register.

Furthermore you have to take into account the expenses for legal advice if a lawyer prepares the acquisition contract. If a real estate agency is involved, you have to take into account the costs for this agency. The brokerage fee differs from region to region. In some regions it is usual that only the buyer pays a percentage up to 7,14 % of the purchase price. In other regions buyer und seller share the brokerage fee, so buyer and seller have to pay 3,57% each (VAT included). But the brokerage fee for selling (not renting) is not statutorily regulated and therefore often a matter of negotiation.

4) Annual taxes on real property?

In Germany you don’t have to pay annual taxes on real properties. You only have to pay taxes on the incomes which these real properties generate (rental yield etc.). There is no annual tax on a accretion. First, when the real property is sold again, the accretion between buying and selling is taxed under certain circumstances.

5) Have taxes for rental incomes to be paid if the incomes are generated by a foreign private person or company?

a) Incomes that are generated by a foreign private person or a foreign partnership

The code that is applicable is the income tax code (EStG). According to § 1 III EStG, private persons who have no residence in Germany are however limited subject to tax for the types of incomes stated in § 49 EStG, also for incomes from rental if the rental subjects are situated in Germany. The percentage depends on the taxable income. Annually the first 7834 EUR are free of tax, after that the tax rate progresses up to 42 % max for annual incomes over 52.882 EUR and 45 % for incomes over 250.731 EUR . A foreign partnership pays the same taxes. Commercial tax only has to be paid if there is a commercial unit in Germany. In addition to these tax rates you have to pay a special contribution to support development of Eastern Germany of 5,5% of the tax rate .

b) Incomes that are generated by a foreign joint stock company

The code that is applicable is the corporate tax code (KStG). According to § 2 KStG, corporates are subject to tax for the incomes generated in Germany, also for incomes from rental if the rental subjects are situated in Germany. The tax rate is 15 %. In addition to these tax rates you have to pay a special contribution to support development of Eastern Germany of 5,5% of this tax rate, so the complete rate is 15,825 %.

c) Incomes that are generated by a GmbH

The GmbH is the most common limited company in Germany. The applicable code is the corporate tax code (KStG). According to § 1 KStG, GmbHs are subject to tax for the incomes of the GmbH. The incomes from rental are seen as GmbH incomes. The tax rate is 15 %. In addition to these tax rates you have to pay a special contribution to support development of Eastern Germany of 5,5% of this tax rate, so the complete rate is 15,825 %.

Be aware that that the German GmbH must also pay – in contradiction to a foreign company – commercial tax in Germany. The percentage of commercial tax depends on the factor for tax purpose and differs from municipality to municipality. The commercial tax can accounted for operating costs. There is a commercial tax exemption for companies, that only manage its own real properties. This exemption contains incomes from rental and profit from disposal (however commercial trade of real properties is subject to tax).

Furthermore one has to take into account that dividend payout can be subject to withholding tax.

Result: Taxes have to be paid in Germany for rental incomes. The tax rate differs between natural persons or partnerships on the one hand and joint stock companies on the other hand.

6) What is better: Buying and holding real properties as a private person or as a limited company?

It is difficult to make a general decision, so I can only give a general advice: Regarding the rental incomes, as a natural person or partnership you have to pay income tax. The tax rate depends on the volume of the rental income. Annually the first 7834 EUR are free of tax, after that the tax rate starts with 14 % and progresses up to 42 % max for annual incomes over 52.882 EUR and 45 % for annual incomes over 250.731 EUR.

A limited company is subject to tax according to the corporate tax code (KStG), also for incomes from rental. The tax rate is 15 %.

In addition to these tax rates you have to pay a special contribution to support development of Eastern Germany of 5,5% of the tax rate.

So if the volume of the rental income is high, there is a significantly lower tax rate on rental incomes if they are generated by a limited company. Furthermore creating a limited company avoids the personal liability. On the other hand you have to take into account that founding a company causes expenses and you possibly have to pay commercial taxes and taxes on dividend payout.

7) Costs for foundation of a limited company? Where can be its residence? Costs for administration, management etc. Tax and costs for the auditor?

a) Cost of foundation of a limited company

The costs of a foundation of a limited company depends on the registered capital. The minimum capital of a German GmbH is 25.000 EUR. For a few years it has been possible to found a German limited company with 1 EUR – the so-called “Unternehmergesellschaft (haftungsbeschränkt” (UG). But it is not recommendable to found an UG because the UG hasn’t been well accepted in Germany.

Beside the registered capital itself the costs for a foundation of a GmbH with a registered capital of 25.000 EUR are listed in the following chart:

Registered capital
(in EUR) Normal fee for notarization of statutes (in EUR) Fee for notarization of statutes if it is a one-person GmbH (in EUR) Fee for notarization of the shareholder meeting (in EUR) Entry in commercial register (in EUR)
25.000,- 168,- 84,- 168,- 42,-
50.000,- 264,- 132,- 264,- 66,-
500.000,- 1.614,- 807,- 1.614,- 403,50
Additional fees arise for promoting and supervising activities of the notary (but only 50 EUR max if the registered capital is 25 000 EUR). Furthermore fees arise for the electronic communication of the entry in the commercial register, clerical activity, call, fax, postal charges. To all expenses you have to add 19 % VAT.
(http://www.notar-veit.de/die_urkunden/notarkosten/notarkosten_gesellschaften.htm)
So in all you will have to pay notary costs of ca. 450 EUR + 19% VAT. If it is a one-person-GmbH the notary costs are lower (280 EUR + 19 % VAT). If the model record is used, the costs are only ca. 120 EUR. In addition to that, legal advise or trademark inspection can cause further expenses.
b) Residence of a limited company
Regarding the residence, you have to differ between the residence that is stated in the statutes and the real administration residence. On the one hand, in the statutes there must be stated a residence in Germany. It doesn’t matter where in Germany the residence is (§ 4a GmbHG). There must be an address for official service (§§ 8 IV 1, 10 I GmbHG) in Germany. On the other hand, the real administration residence can be outside Germany.
Outlandish companies have the possibility to do all the business activity and administration activity in Germany, therefore the shareholder of the German GmbH – vice versa – have the possibility of a administration residence abroad.
c) Cost for administration / management of the company / costs for an auditor
This question cannot be answered generally. It depends on the volume and the configuration of the company. While the notary costs and costs for an attorney are stated legally, the costs for an audition are a matter of negotiation. The auditors charge hourly rates or daily rates or fixed amounts. The costs depend on the importance of the activity, the volume and difficulty, the specific risk of liability and the qualification of the auditor. Normally fixed amounts are only offered if the auditor can estimate the volume of the activity in advance.
However, the costs for a tax consultancy are legally stated in the StBGebV. This regulation differs between fees that are orientated towards the value of the matter, fees that are orientated towards the necessary time, and fixed amounts. However, the fees that are orientated towards the time are not legally stated as an fixed amount, but the regulation only describes a margin and the auditor can decide what he wants to charge within this margin. For example, the auditor is allowed to charge costs for a tax consultancy between 19 EUR und 49 EUR per half an hour or part thereof.
If the auditor gives advice in judicial matters, the fees he can charge are legally stated in the RVG. In this regulation generally the fees are orientated towards the value of the matter. But the RVG also allows to agree to fees that are orientated towards the necessary time and fixed amounts.
(http://www.was-kostet-ein-wirtschaftspruefer.de/)

8) What are the differences if the company is founded in an foreign country?
Some differences have already been described above. If the company is founded in a foreign country, you don’t have to pay commercial tax in Germany. If you found the company in another country, you might have to pay commercial taxes there. Founding a company with limited responsibility in another country, you have another company form, not a German GmbH or an AG but e.g. an English Limited (Ltd.) or an Italian s.r.l..

9) Costs for administration / management of the real property?

The costs for administration / management of a real property depend on many different circumstances. Therefore only a few general aspects can be described. The costs differ very strongly. The offers of professional property management agencies differ up to 100 %. Especially in the beginning of the activity independent caretakers often offer low prices to gain a foothold. The costs depend on the size of the real property, of course. The bigger the house, the cheaper the administration costs per unit. If you have a facility with 50 apartment units, the costs for the facility management can be e. g. 17 EUR per unit. If it is a house with only two rented apartments, the costs can be 35 EUR per unit. The costs for the facility management is often indicated as a percentage of the rental payment. Therefore the facility manager is always interested in acting in accordance with the wishes of the landlord – the facility manager will agree the best rental payments possible and will avoid vacancies. Facility management costs – indicated by a percentage of the rental payment – can be e. g. 5 % of the rent excluding service charges or 6 % of the rent including service charges. As written above, the differences depend on the size of the object and also on the location of the real property and the leasing capacity. To all prices indicated above you have to add 19 % VAT.
(http://www.hausverwalter-vermittlung.de/blog/hausverwaltung-kosten-pro-einheit/)
10) Costs for a real property agency and costs for legal advice

As written above, if a real estate agency is involved, you have to pay brokerage fee. The brokerage fee differs from region to region. In some regions it is usual that only the buyer pays a percentage up to 7,14 % of the purchase price. In other regions buyer und seller share the brokerage fee, so buyer and seller have to pay 3,57% each (VAT included). But the brokerage fee for buying is not statutorily regulated and therefore often a matter of negotiation.

If you also engage a broker to find tenants, you normally don’t have to pay for him. The broker charges 2,38 times the monthly rent excluding service charges – but this charge has to pay the tenant. By the way, this is the maximum price the broker can charge because it is stated legally in § 3 II WoVermittG.
The cost for legal advice cannot be estimated generally. As written above, the fees for a lawyer are legally stated in the RVG. But it is also widely allowed for the lawyer and his client to agree a fixed amount or a fee that is orientated towards the necessary time.