Immobiliengesellschaft: How to save on taxes in Germany with a real estate GmbH

Contents

• What is a real estate GmbH?
• Setting up a “Vorschalt-GmbH”
• What are the advantages of forming a real estate GmbH?
• Where is it possible to save on taxes?
• Avoid trade tax with a real estate GmbH
• Crunching the numbers
• How do I form a real estate GmbH?
• Where do I register it?
• What should I keep in mind?
• Speculation periods don’t apply
• Want to know more about the GmbH?

Definition: What is a real estate GmbH?

In general, a company that finances, rents, develops, and markets real estate (Immobilien) is referred to as a real estate company (Immobiliengesellschaft or Immobilienunternehmen).

The term Vermietungsgesellschaft (leasing company) is often used as a synonym. Real estate companies can be corporations (UG, GmbH, AG) or partnerships.

Setting up a real estate company as a “Vorschalt-GmbH”

This guide deals with the particular case of real estate companies or a type of real estate holding company – a so-called Vorschalt-GmbH – which private owners of rental housing can take advantage of to reduce their tax dues.

A real estate holding company involves a private individual buying a rental property through a corporation so that the rental income can be taxed as corporate income.

Incorporate and save: What are the advantages of forming a real estate GmbH?

Whoever owns rental property must pay tax on their rental income according to their personal income tax rate. This means that, in the worst case, the owner of a rental property would pay up to 45% of their earnings in taxes.

When taking the Solidaritätszuschlag (solidarity surcharge) and Kirchensteuer (church tax) into account, total tax dues could equal up to 50%, depending on the income amount.

If you form a leasing company in the form of a GmbH instead of continuing to invest in real estate properties as a private individual, you could lower your tax rate to about 16%.

Where is it possible to save on taxes?

Corporations have low-income tax rates, and their rental income is only burdened by a corporate tax (Körperschaftssteuer, or KSt for short) rate of 15%. The 5.5% solidarity surcharge on top of that results in a tax rate of 15.83% for corporate rental income.

Circumventing trade tax with a real estate GmbH

In general, corporate commercial gains are subject to Gewerbesteuer (trade tax). However, landlords and lessors are not considered to be participants in general economic trade, as business conducted by a landlord is classified as asset management.

In general, private asset management does not fall under the category of taxable commercial activity.

Consequently, trade tax on trade income for the management and use of one’s own real estate no longer applies, according to § 9, no. 1, sentence 2 of the Gewerbesteuergesetz (trade tax act). This is exactly where the difference to commercial real estate companies lies.

Want to learn more about asset management limited liability companies in Germany? Click here for an overview. 

Note: As soon as you become economically active as a landlord or lessor, your rental income will be subject to the full trade tax rate.

Among others, economic activities include:

• Renovations
• Construction work
• Repairs

Therefore, a Hausverwalter (property manager) should look after commercial and administrative activities, and a Hausmeister (caretaker) should carry out handiwork.

Tip: If you choose to form a real estate GmbH, you must submit a request to your competent tax authority to claim a trade tax exemption.

Forming a real estate holding GmbH: Crunching the numbers

Let’s say you purchase real estate with a value of €1 million and expect to take in €85,000 per year in rental income. Grunderwerbsteuer (property acquisition tax) will apply to the purchase regardless of whether you acquire the real estate as a private investor or a real estate company. The tax rate varies from one German federal state to another, so we’ll use the national average of 5.3% for this example.

This simple numerical example demonstrates that forming a real estate GmbH for this purchase would result in €27,000 in yearly tax savings.

How do I form a real estate GmbH?

A ‘GmbH’ is a legal company form and is considered a corporation. The owner of a GmbH is called a shareholder. One distinctive characteristic of a GmbH is its limited liability – shareholders don’t put their private assets at risk.

To form a GmbH, shareholders must put forward an initial share capital of € 25,000. Generally, the shareholders aren’t personally liable – only corporate assets are at risk.

Read more on the definition, formation and initial share contribution of a GmbH in our guide.

Where do I register my real estate GmbH?

Registering a real estate GmbH

As a company founder, you must register your real estate GmbH at your local Gewerbeamt (trade office). After registration, your tax authority will contact you regarding tax registration. At that point, you should immediately submit your request for a trade tax exemption.

Registering a real estate company in the commercial register (Handelsregister)

The Handelsregister (commercial register) is a public index of registered merchants under the authority of a competent register court. A GmbH must be entered into the commercial register.

Once the company is entered into the commercial register, it is incorporated, and its CEO is imbued with certain responsibilities. 

What should I keep in mind when forming a real estate GmbH?

No typical profit distributions to shareholders

This model for a tax-optimising real estate GmbH only works when tax savings are used for the purposes of debt repayment and asset investment. As soon as you receive any distribution of profit as a shareholder, your gains become subject to a 25% Abgeltungssteuer (settlement tax), offsetting any taxes saved through a real estate holding GmbH. Extensive tax consultation is an absolute necessity here.

Speculation periods do not apply to real estate GmbH

If you wish to sell real estate property as a private owner, the sale will be taxable, and you will be required to pay taxes (based on your income tax rate) on the profit you make.

However, private asset owners normally benefit from a Veräußerungsfrist (divestiture period) or a Spekulationsfrist (speculation period) pursuant to § 23 of the EStG (German income tax act).

This means that income tax no longer applies to the sale of real estate if ten years have passed since its acquisition. If you form a real estate company to acquire the property, this divestiture period does not apply, and the sale will be fully taxable – regardless of how much time has passed.

Want to know more about the GmbH?

Our GmbH essential reading:

• What is a GmbH?
• The pros and cons of the GmbH
• How to set up a GmbH

Setting up a GmbH:

• Notary costs for establishing a GmbH
• Forming a German company abroad
• How to start a company in Germany

Master list:

• The list of all Company Formation articles

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