Some questions come up again and again in my day-to-day routine at the firm. Here is an overview of the classic ones together with practical answers.
If you would like more in-depth information or have your own particular questions, please feel free to get in touch with me at any time.
In general, you can write off real estate built from 1925 on with 2 % annually, older real estate can be written off with 2.5 % annually. Buildings in operating assets, which are not for residential purposes and for which the building permit was issued after 31 March 1985, are to be written off at a higher rate of tax depreciation of 3 %.
Add to this special write-offs for historic buildings, newly constructed flats for rent and real estate in redevelopment zones.
When real estate is purchased, a framework is set for the amounts of future write-offs. The purchase price must be allocated to the land and to the building. Since it is only possible to write off costs of acquisition pertaining to the building, especially in the case of real estate which you intend to keep as an asset in the long term, it is worth the expense of independent determination of the depreciation assessment base.
In this regard, the Federal Fiscal Court (BFH) ruled that the tax authorities are generally bound by a purchase price allocation specified in the purchase agreement. Consequently, if possible, you should determine the allocation prior to the purchase and include it in the purchase agreement.
As a result of the rapidly increasing prices of real estate over the past few years, the historical costs of acquisition – and thus the depreciation assessment base to date – are often significantly below actual market value. The aim of the depreciation step-up is to boost this potential in order to reduce the future tax burden by means of a higher write-off.
As a result of the development of real estate prices, or in the case of real estate which has been owned for a very long period (50 years in the case of residential real estate) and, consequently, it is in part no longer possible to claim a write-off, it may make sense to consider raising the assessment base (depreciation step-up).
To date, you have claimed depreciation with 2 % of € 300,000. Thus, your annual depreciation currently amounts to € 6,000. Meanwhile, however, the market value for the amount allocated to the building has risen to € 500,000. In this case, a write-off of € 10,000 would be possible. In case of a tax burden of almost 50 %, this results in tax relief amounting to € 2,000 – each and every year!
Moreover, the depreciation step-up aligns very well with financial restructuring.
Generally speaking, you can deduct modernization costs directly, i.e. in the year in which they are paid. It is required, however, that you meet the following prerequisites:
If you do not meet these prerequisites, then you cannot deduct the expenses directly; instead you must write them off together with the building’s costs of acquisition with 2 %, 2.5 % or 3 %. Differentiation of the individual criteria is at times very complicated; moreover, there is also certain leeway available in terms of structuring. This makes it all the more important to involve a tax consultant in good time before you start implementing your measures!
If a piece of real estate which is rented out is sold within ten years, the profit from this, as a private sales transaction, is subject to so-called “speculation tax”. The time of the binding business transaction is deemed decisive, i.e. the day of the appointment with the notary public as a rule. From a tax perspective, it is therefore recommended not to sell until ten years have passed; or to use it for your own residential needs in the year in which it is sold and the two years prior to that. For this, it is sufficient if you have only used the piece of real estate yourself on one single day on two occasions in the second year before the sale and in the year of the sale respectively: on 31 December in the second year before the sale and on 1 January in the year of the sale. You only have to document uninterrupted use in the year before the sale.
The same advantage applies if you have children for whom you still receive the child allowance. In this case, you can have your older children reside at the property (rent-free).
In the case of renting to close relatives, it used to be necessary to charge a minimum rent of 66 % of the rent which is customary in that area in order to be able to deduct all expenses incurred for the rental property. This minimum has now been lowered from 66 % to 50 %. If the rent is more than 50 %, but less than 66 %, as was the case until several years ago, the requirement of a total surplus forecast is introduced. If, according to the anticipated calculation, a total surplus is generated, it is possible to deduct all allowable expenses even if the rent amounts to 50.01 % of the rent which is customary in that area. In the case of charging a rent which is at least 66 % of the rent which is customary in that area, you can claim all allowable expenses without further examination.
In a non-binding and personal meeting, we first discuss your individual situation until all points have been clarified. This is used as a basis for defining how to proceed further. In the case of taxes evaded on capital gains, you grant me power of attorney for the tax authorities and for the foreign bank. I then contact the bank without delay and have them send me the necessary bank documents directly and anonymized.
After receiving the documents, I will determine the income arising from capital investments and private sales transactions as well as the taxes owing including interest. In connection with this, any deductible expenses, allowable foreign taxes or losses will be claimed. Finally, we discuss the results and submit the voluntary self-disclosure to the fiscal authorities.
Yes. The basis for this is the automatic exchange of information (AEOI). AEOI is an international automated standard, which regulates how the tax authorities of the participating countries exchange data on accounts and securities portfolios of those required to pay taxes. The first data was exchanged in autumn 2018. In actual tax accounting practice, this was apparent in the increasing number of requests from the fiscal authorities for information on foreign bank accounts belonging to those required to pay taxes which had not yet been declared.
For a voluntary self-disclosure with the effect of exemption from punishment, there are numerous conditions for validity. The most important ones are these:
In particularly serious cases of tax evasion (according to the Federal High Court of Justice (BGH) from € 50,000 in evaded taxes), voluntary self-disclosure with exemption from punishment is not generally possible. As a rule, this also applies to offences as a result of which more than € 25,000 in taxes per offence were evaded. However, this can be remedied by paying a “penalty”.
The guarantee of the completeness of the voluntary self-disclosure, in terms of time as well as in terms of content, is the focus and centre of any voluntary self-disclosure.
Yes, you have to pay taxes on a severance payment. Albeit, there is normally the option to tax such according to the so-called one fifth rule: as a result of this, depending on the constellation, there may be considerable tax savings.
The one fifth rule is a special form of taxation for remuneration which extends across several years such as severance payments, as well as multi-year bonus payments. The high tax burden is to be reduced as a result of our progressively structured tax scale. The calculation is made in three steps: in the first step, the income tax is determined without including the severance payment and/or multi-year bonus (example: € 20,000). In the second step, the tax burden is determined with one fifth of the severance payment and/or multi-year bonus (example: € 28,000). In the third and final step, the difference arising from Step 1 and Step 2 (€ 8,000) is multiplied by five (€ 40,000) and added to the tax burden from Step 1 (€ 60,000).
As early as possible. Tax optimization in the case of severance payments can be roughly divided into three areas:
Ideally, of course, all three items are harmonized and optimized.
Even if you do not exceed the tax exemption limit in the case of a gift or inheritance, you must report every acquisition to the corresponding tax authorities within a period of three months after gaining knowledge of the asset received. In the case of a gift, this applies to the donor as well as to the donee.
However, reporting is not mandatory if, in your case, the acquisition is as a result of a disposition by will initiated by a German probate court or a German notary public; then the tax authorities are actively notified by these offices.
You are initially only required to report the gift / inheritance to the tax authorities. You are not required to file an inheritance tax declaration or gift tax declaration until ordered to do so by the tax authorities.
Albeit, there may also be tax obligations abroad – as a result of your place of residence, your citizenship or your foreign assets (e.g. interest in a closed foreign fund). The USA in particular has very strict deadlines which are enforced by means of heavy fines.
Many public offices and institutions – such as banks, courts and notaries public – are required to submit a corresponding notification to the inheritance tax authorities. At the same time, the inheritance tax authorities obtain information themselves.
Many local tax authorities have ceded their jurisdiction for inheritance and gift tax: consequently, the Fulda tax authorities are responsible for Frankfurt am Main.
Depending on the personal relationship of the acquirer to the bequeather or donor, one differentiates between three tax categories:
Your tax rate is dependent on your tax category: the tax rate is between 7 % and 30 % in Tax category I, between 15 % and 43 % in Tax category II and between 30 % and 50 % in Tax category III.
Spouses and partners in civil unions have a tax exemption limit of € 500,000, children have a tax exemption limit of € 400,000.
Furthermore, you can take advantage of numerous tax exemptions on substantive grounds, e.g. for household effects, other movable property (e.g. vehicles) or the family home.
For the calculation of the current tax, for both inheritance tax and gift tax, you must take all previous gifts you have received from the same person over the past ten years into consideration.
Yes. You can claim costs of inheritance, e.g. funeral costs, court costs, tax accountant costs, costs for expert reports, as inheritance liabilities in the inheritance tax declaration. The law governing the costs of inheritance specifies a fixed amount of € 10,300. You only need to declare costs which exceed this fixed amount.
Yes! If planning is done in a timely manner, in many cases, the tax load can be greatly minimized or in some cases even avoided altogether. Make the most of your options for drafting wills accordingly, making optimum use of tax exemptions, extending gifts across a longer time period or taking further options into consideration.
The more complex and extensive your assets and/or family situation are, the earlier you should commence with planning. When you are young, you can only make plans for an emergency situation. But by the time you reach your mid-fifties at the latest, you should actively broach the subject of your inheritance planning and – if required – take initial steps towards its implementation.
On the one hand, you are required to retrospectively declare the earnings for which taxes were evaded to the tax authorities and pay the income tax owing. On the other hand, you also need to specify the earnings for which taxes were evaded in the inheritance tax declaration and, if the tax exemption limit is exceeded, pay inheritance tax as well.
NB: If you fail to make this retrospective declaration, you yourself are committing tax evasion.
As long as you act fast and do not claim the inheritance for the time being – e.g. by means of appropriate action – there are often structuring options still available even after an inheritance case is initiated.
The popular and frequently used Berlin Testament, can lead to considerable tax disadvantages, which however can often still be minimized even after the death of the first spouse.
If you as the bequeather or heir, or donor or donee, had your residence or habitual abode in Germany, then your entire inheritance is subject to German inheritance tax. Your nationality is not relevant in this regard.
However, German citizens who have relinquished their German residence for fewer than five years are also subject to unlimited tax liability.
Those in Germany who are not subject to unlimited tax liability are at least subject to limited tax liability with regard to their domestic assets.
Whether or not taxation applies in the other country depends first of all on the laws of that other country. If this is the case, then the question to ask is how to avoid double taxation in your case. In contrast to the case with tax on earnings, Germany has only concluded double taxation treaties for the handling of inheritance and gift tax with a few other countries. This may result in the risk of double taxation.
If there is no double taxation treaty, in many cases it is possible to offset the foreign tax against the German tax. Please note, however, that this is not always possible, and more importantly not always possible to the full extent!
In contrast with the case of double taxation treaties on income, Germany has concluded double taxation treaties which govern inheritance tax with only five countries: Denmark, France, Greece, Switzerland and the USA. Only three of these, namely the treaties with Denmark, France and the USA, also apply to gifts.
Moreover, the “normal” double taxation treaty with Sweden also contains provisions concerning the taxation of inheritances and gifts.
A foundation is a legal entity created in perpetuity which pursues a purpose defined by the founder. Unlike all other legal forms, however, a classic foundation with legal capacity has no managing partners or members. It is independent and belongs to itself.
Foundations can be differentiated in various ways: in the case of the classic categorization according to a foundation’s purpose, you differentiate between charitable foundations and family foundations. But categorization is also possible according to the legal basis (private law vs. public law), legal capacity (foundation with legal capacity vs. foundation trust), use of foundation assets (income foundation vs. limited term trust) or other criteria.
Any adult can establish a foundation, as well as any legal entities. The prerequisite is, however, that you are able to contribute a sufficient amount of wealth to the foundation. If you would like to establish a foundation with legal capacity in perpetuity, this wealth should amount to at least one million euros in view of the low interest rate period at present. After all, the foundation is to serve its purpose using the income. On the other hand, if you would like to establish a limited term trust or a foundation trust, lower amounts are also possible.
In general, you can contribute any kind of asset to a foundation. Monetary assets, real estate, also subject to usufruct reservations, as well as company shares are possible.
First up, establishing a foundation starts with drafting the concept of the foundation. In this concept, we work together to develop the respective parameters (charitable vs. family foundation, foundation in perpetuity vs. limited term trust). This is used as a basis for drafting foundation statutes including the name and purpose of the foundation. We then submit the draft for charitable foundations to the tax authorities for examination. The next step is for you to specify the managing board of the foundation. In addition, you can have a foundation council act as a supervisory body.
Last of all, you provide the foundation with capital and submit your application for establishing a foundation to the supervisory authorities with jurisdiction.
Increases in foundation capital are the best option. Such increases raise the nominal capital of your foundation – and consequently also the proceeds. But friends and relatives can also contribute, e.g. in lieu of gifts. For such contributions, the – charitable – foundation issues donation receipts. Your friends and relatives can use these contributions for tax purposes.
In general, I offer you two options: the increase in foundation capital during your lifetime or the increase in foundation capital by will. The former has been popular for some time now since it opens up numerous advantages: on the one hand, as a founder, you can enjoy the fruits of your contribution during your lifetime. On the other hand, you can then monitor the work of the foundation.
Yes! With the exception of a limited term trust, foundations are obliged to retain foundation assets. Thus, the capital must be of a sufficient amount so that it is possible to effect the foundation’s purposes using the foundation’s income.
In addition to the classic foundation in perpetuity, i.e. a foundation in which the foundation capital is to be permanently retained, there is a further type: the limited term trust. In this case, you not only use proceeds from the foundation assets, but also the foundation assets themselves for realization of the foundation’s purposes specified by you. These assets are completely used up in the course of the trust’s existence.
No. You can also opt for a volunteer foundation board or a paid foundation board. Since a foundation is conceived to last for time immemorial, it makes sense to devise a meaningful, future-proof structure for the foundation’s management.
With a charitable foundation, you can pursue benevolent, religious or charitable purposes (cf. link below). Upon establishing the foundation, you define the purposes which are to be supported by the foundation. How these are to be fulfilled in detail, whether in Germany or abroad, is up to you and/or your foundation board.
It is permitted for your foundation to use a donation immediately in order to pursue the purpose of the foundation. A contribution to the foundation’s capital, on the other hand, increases the capital stock of your foundation to be retained. Increases in foundation capital therefore serve to secure future proceeds by means of a profit-generating investment.
The State supports the advancement of purposes for the common good by granting foundations extensive tax advantages. Accordingly, having a foundation of your own can significantly reduce your tax burden.
A foundation trust is a legally non-independent foundation without legal capacity, which is set up using a contract between a founder and a trustee. As the founder, you then transfer your assets, subject to conditions, to the trustee, who then manages the business of your foundation.
A foundation which is provided with assets is considered to be a family foundation. Its receiving beneficiaries are related to the family of the founder. Since income generated on an ongoing basis such as rent, capital gains or company profits can be paid out to the beneficiaries, this type of foundation is not charitable.
Family foundations are not charitable foundations. As a result, they are not tax-exempt. Please note that tax will therefore apply at various points, e.g. within the scope of establishment. However, this tax burden needn’t necessarily be a disadvantage – especially when compared to other solutions and depending on the family constellation.
When the foundation is established, it is subject to gift tax upon transfer of the asset values. Taxation is based on the degree of kinship between the founder and the family members who are the beneficiaries. The amount which is tax-exempt and the tax rate of the gift tax may vary considerably depending on the relationship within the family. Thus, in the case of Tax category III, the tax-exempt amount is € 20,000 while, in the case of Tax category I, it can be up to € 500,000 (for the spouse). NB: This applies only within the scope of establishing the foundation. Subsequent contributions to the foundation assets are subject to the unfavourable Tax category III.
A family foundation, with its income, is subject to taxation with corporate tax in the amount of 15 %, whereby, pursuant to § 24 of the German Corporate Income Tax Act (KStG), a tax-exempt amount of up to € 5,000 can be claimed, which also applies to trade income tax (“Gewerbesteuer”). Moreover, there is taxation with regard to substitute inheritance tax (“Erbersatzsteuer”).
A foundation cannot die. In order to ensure that families do not avoid paying normal inheritance tax by way of a foundation, the law levies substitute inheritance tax. Accordingly, the assets of your family foundation are subject to substitute inheritance tax every 30 years. A fictitious inheritance incident with two children is assumed with a corresponding tax-exempt amount of up to € 800,000 (€ 400,000 per child). The tax rate ranges from 7 to 30 %.
Family foundations abroad, on the other hand, are not subject to substitute inheritance tax in Germany. This also applies if your foundation has assets in Germany or if you as the founder and/or the beneficiaries are required to pay taxes in Germany.
Pay-outs made to the beneficiaries, as income from capital investments, are subject to capital gains tax in the amount of 25 % (plus any applicable solidarity tax surcharge and church tax).
A family foundation offers you numerous important advantages:
In addition to numerous advantages, a family foundation involves some disadvantages.
Instead of a family foundation, you could consider establishing a charitable foundation or a family business.
You have unlimited tax liability in Germany if your residence (§ 8 of the Fiscal Code of Germany (AO)) or your habitual abode (§ 9 AO) is in Germany.
If you do not reside in Germany, you may possibly be subject to limited tax liability. For example, if you earn domestic – i.e. German – income in the context of § 49 of the German Income Tax Act (EStG).
Moreover, a tax liability may also apply as a result of special standards, e.g. German Foreign Tax Law (Außensteuergesetz).
A fiscal domicile is the place at which you “maintain a dwelling under circumstances from which it may be inferred that [you] will maintain and use such dwelling”. (§ 8 AO)
Simply providing proof of habitability including water and power supply is sufficient. Furthermore, you must have power over the keys to your domicile. According to the current understanding of the law, a room at a friend’s which is at your permanent disposal or a flat which is only used sporadically during the term of a secondment may also qualify.
A hotel room, on the other hand, is not considered to be a residence. If you rent out your flat during the secondment, this no longer constitutes a residence. Since it is no longer available for your own use.
However, in actual practice, such cases are often unclear, so you should have someone take a close look at the individual circumstances.
“[You] shall have [your] habitual abode at the place at which [you] are present under circumstances indicating that [your] stay at that place or in that area is not merely temporary. An unbroken stay of not less than six months’ duration shall be invariably and from the beginning of such stay regarded as a habitual abode in the territory of application of this Code; brief interruptions shall be excepted.” (§ 9 AO)
The time stipulation of six months does not apply if your stay in Germany is undertaken exclusively for visiting, recuperation, curative or similar private purposes and does not last more than one year.
If you do not have your residence or habitual abode in Germany but have domestic income (e.g. resulting from renting out German real estate), you are subject to limited tax liability.
If this is also not the case, you are generally no longer required to pay taxes in Germany. Albeit, a tax liability may arise from some constellations, e.g. as a result of the German Foreign Tax Law (Außensteuergesetz). Unequivocal clarification in your individual case will require the help of an expert.
Furthermore, some tax-related benefits, e.g. the child allowance, use unlimited tax liability as a basis. These will normally not apply if you give up your residence.
No. Merely giving notice of departure from a residence within the scope of the German Registration Law (Melderecht) does not lead to there no longer being a residence with regard to taxes (cf. fiscal domicile).
The entitlement to the child allowance is generally linked to unlimited tax liability. So if you keep your residence, you will continue to be entitled to the child allowance. When you give up your residence, you lose your entitlement to the child allowance unless you have employment which is subject to social insurance contributions.
Please note: Be sure to notify your family benefits office (Familienkasse) about any move abroad.
If you belong to a religious group which is entitled to tax, you have to pay church tax.
If you are Protestant, you are only required to pay church tax if you declare that you belong to a Protestant church in Germany.
On the other hand, if you were baptised Roman Catholic, you are required to pay church tax in Germany. This is because the Roman Catholic church is a global universal church. In this case, it is of no consequence whether you declare membership in Germany or whether the Roman Catholic church in your home country receives church tax.
If you are no longer subject to unlimited tax liability in Germany, then you are considered to be a non-resident taxpayer. You should let your bank know this since it may be possible to avoid the deduction of capital gains tax on your capital earnings.
Double taxation treaties regulate the allocation of taxes between two countries. It is assumed for this that there is a country of residence and a country of activity/source.
The country of residence is the country in which you have a residence. If, however, you have a residence in both countries, the country which is the centre of your vital interests is considered to be the country of residence. Present and future economic and personal criteria are evaluated, whereby the latter are more greatly weighted.
That depends. If you still have your residence or habitual abode in Germany, you will continue to be subject to unlimited tax liability. If you have neither your residence nor habitual abode in Germany but have domestic income (e.g. resulting from rentals), you will be subject to limited tax liability in future.
If this is also not the case, you are generally no longer required to pay taxes in Germany. Albeit, a tax liability may arise in some constellations, e.g. as a result of the German Foreign Tax Law (Außensteuergesetz). Unequivocal clarification will require the help of an expert in your individual case.
In general, the country of activity has tax jurisdiction. However, this does not apply if
Ascertainment of the 183-day limit varies from one double taxation treaty to another. This ascertainment can be based either on the tax year, the calendar year or a 12-month period.
If these conditions are met cumulatively in your case, tax jurisdiction returns to the country of residence.
Here, too, there are peculiarities in many double taxation treaties – e.g. if you are a cross-border commuter, supervisory board member or executive, or if there are general reversion clauses in your case.
When determining how to count the days, please ensure that the actual days spent in the country in question are counted. For instance, if you were in France from 1 March to 31 August (184 days), then you exceed the 183-day limit. You must however deduct from this any interim holiday in another country!
No. As shown here, the 183-day limit is just one of three conditions which must be met.
Generally yes, unless there is a regulation which applies to this exception in your case.
Exemption with progression means that some income may by tax-free but is considered for the determination of your individual tax rate. This income increases your tax rate, which is ultimately applied to taxable income in Germany.
Are you an employee with unlimited tax liability who works for your domestic employer, and as such have served temporarily for at least three months in a foreign country for which, however, there is no double taxation treaty? In this case, the Edict on Employment Abroad (ATE) grants you tax exemption on your wages.
This only applies to work in connection with setting up or maintaining commodities, finding or extracting natural resources, development aid or consulting in these areas.
The information and answers provided here are highly complex, convoluted and, therefore, explained in a way which is greatly simplified in part. Always ensure that every single case is clarified in detail or have it individually analysed and assessed by an expert.