Could it be worth your while to convert your private residential property into a corporation? Find out here how an Immobiliengesellschaft (real estate GmbH/limited liability company) can reduce taxes!
Definition: What is a real estate company?
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).
Distinction: Forming 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 company?
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 company
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:
- Construction work
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: A numerical example
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.
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 trade office (Gewerbeamt). 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 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 companies
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 German Income Tax Act (EStG). 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.
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The information published on our site is all written and checked by experts with the utmost care. Nevertheless, we cannot guarantee its accuracy, as laws and regulations are subject to constant change. Therefore, always consult an expert in a specific case – we will be happy to put you in touch.
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