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Germany
Münster Regional Tax Administration’s Guidance on Tax Treatment of Foreign Real Estate Companies
In an administrative order dated 24 July 2008, the Münster Regional Tax Administration commented on the tax treatment of (1) corporate real estate management entities formed under foreign law and (2) partnerships that are deemed to be engaged in a commercial business by reason of their structure and have a foreign corporate entity as their general partner.
The following discussion provides a summary of the guidance. For a printable version of this discussion, prepared by the KPMG member firm in Germany:
TaxNewsFlash-Germany
Acquisition of Real Estate by Corporations
- Liability to corporate income tax
Corporations having their registered office in a foreign jurisdiction and that are incorporated under foreign law are subject to corporate income tax in the domestic territory on a resident basis if their principal place of management is located in the domestic territory. Liability to corporate income tax on a resident basis subjects foreign corporations to taxation on their worldwide income in the domestic territory.
If, on the other hand in addition to the registered office, the principal place of management is also in a foreign jurisdiction, the foreign corporation is subject to corporate income tax on a nonresident basis,
i.e., solely with regard to its domestic-source income.
Current rental income derived by nonresident corporate entities is classified as income from rental and usufructory leasing under the presently applicable law. This is true even if a commercial business is carried on outside of the domestic territory in addition to the asset management activity.
Current income is calculated for nonresident corporations as the excess of revenue over the costs of earning nonbusiness income. The domestic real property of non-resident asset management corporations does not constitute business property.
This has the following consequences:
- Only straight-line depreciation may be taken on buildings.
- Writedowns to going concern value are not permissible.
- It is not possible to transfer unrealized appreciation to replacement assets or to avoid gain by establishing a rollover reserve under § 6b EStG (Income Tax Law).
Beginning with the 2008 assessment period, it is necessary to ascertain whether the earnings stripping rules apply in the event of debt-financed acquisition of domestic real property. The earnings stripping rules apply analogously to foreign corporations that determine income as the excess of revenue over the cost of earning nonbusiness income.
As a rule, the parcel of land located in the domestic territory does not constitute a permanent establishment. For want of a domestic permanent establishment, there is generally no commercial business, which means that the current rental income is not subject to trade tax.
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Acquisition of Real Property by Partnerships with Imputed Commercial Status
The activities of an asset-management partnership are deemed to constitute a commercial business if all partners with personal liability are corporations and only they or third parties have management authority. The legal fiction of a commercial business also applies to a foreign asset management partnership if it corresponds to a domestic partnership with respect to its legal structure and its economic organization. The imputation of commercial status can be triggered with respect to both foreign and domestic partnerships by having a foreign corporation as general partner.
When classifying the income from rental and usufructory leasing of a partnership to which commercial status is imputed, but that has no domestic permanent establishment, the impact of isolated analysis must be considered, since the attribute that results in imputation of commercial status to the partnership exists solely outside of the domestic territory and is hence disregarded. The non-resident partners of a Ltd. & Co. GP to which commercial status is imputed can accordingly derive income from rental and usufructory leasing.
Changes Contained in the 2009 Tax Act
The discussion above does not take account of the planned changes due to the 2009 Tax Act. In the version of the government draft of 18 June 2008, the 2009 Tax Act would classify income from rental and usufructory leasing of domestic immovable property as income from commercial business activity even in the absence of a domestic permanent establishment. This has hitherto been the case only with respect to sales of real property. The planned reclassification of income from the rental and usufructory leasing of domestic immovable property as income from commercial business activity would make the earnings stripping rules directly applicable as opposed to merely analogously applicable from the 2009 assessment period onwards.
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For more information, contact a tax professional with KPMG’s German Tax Center of Excellence:
Eckart Nuernberger, (212) 954.7950,
eckartnuernberger@kpmg.com
Fabian Gaffron, (212) 872.3686, fabiangaffron@kpmg.com
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