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

updated on 18. January 2023 12 minutes reading time
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Could it be worth your while to convert your private residential property into a corporation? Find out here how an Immobiliengesellschaft (real estate limited liability company) can reduce taxes!

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Andreas Munck

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Definition: What is a real estate GmbH?

In general, a company whose activities include the financing, renting, developing and marketing of real estate (Immobilien) is referred to as a real estate company (Immobiliengesellschaft or Immobilienunternehmen).

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

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

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

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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 trade tax (Gewerbesteuer). 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 German Trade Tax Act (Gewerbesteuergesetz). 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. 

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

Among others, economic activities include:

  • Renovations
  • Construction work
  • Repairs

Commercial and administrative activities should, therefore, be allocated to a property manager (Hausverwalter), and handicraft activities should be carried out by a caretaker (Hausmeister).

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

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. Property acquisition tax (Grunderwerbsteuer) will apply to the purchase regardless of whether you acquire the real estate as a private investor or as 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.

Costs and Taxes Due Private Landlord Real Estate GmbH
Purchase price of the property €1,000,000 €1,000,000
Average property acquisition tax (5.3 %) €53,000 €53,000
Expected rental income (per year) €85,000 €85,000
Taxes due €38,250

(Income tax rate of 45%)

€12,750

(Corporate tax rate of 15%)

Solidarity surcharge

(5.5 % of applied tax rate)

€2,104 €701
Total tax rate 47.48 % 15.83 %
Total taxes due €40,354 €13,451
Expected rental income

(per year, after taxes)

€44,646 €71,549
Yearly tax savings  –  €26,903 

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.

Business registration in Berlin (downloadable form)

Business registration in Hamburg (downloadable form)

Business registration in Munich (downloadable form)

Business registration in Cologne (downloadable form)

Business registration in Frankfurt (downloadable form)

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

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

Once the company is entered into the Handelsregister the company 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% settlement tax (Abgeltungssteuer), 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 divestiture period (Veräußerungsfrist) or a speculation period (Spekulationsfrist) 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.

 

[BEGIN: Insert an Image between this tag]

Andreas Munck

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Still got questions?

  • Startup expert
  • 10+ years experience

Hi, I’m Andreas and I’ve been advising businesses in Germany for over a decade. I’d be happy to call you and answer any questions you have in a one-on-one consultation.

 

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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

GmbH basics:

CEO salary in a GmbH
GmbH shareholder rights and obligations
What is the difference between the AG and GmbH?

Setting up a GmbH:

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

Master list:

The Master list of all Company Formation articles can be found here. 

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