© MAST - Fotolia.com
Grunderwerbssteuer
Land tax is the German government’s third largest source of income. However, the system is in need of a serious shake up, a fact that is recognized by the Federal Constitutional Court which has given the government until the end of this year come up with a system that no longer relies on outdated criteria.
The German business press has been devoting acres of column space to a thorny issue which has been around for years, but has never been properly addressed. That issue is German property tax (Grundsteuer), and the extent to which the tax levied by cities and municipalities is either fair, or indeed even constitutional.
Matters reached a head recently when the country's highest court – the Constitutional Court in Karlsruhe – sat to give a provisional opinion on whether the status quo is sustainable. The court is starting deliberations as to whether the tax infringes on the principle of equality as embedded in Germany’s constitution, also known as the Basic Law (Grundgesetz). A final ruling is not expected for several months.
The outcome of their mullings could have a direct effect on 35 million pieces of real estate, billions in state revenues and hundreds of jobs throughout the land.
At the nub of the matter is the arbitrary and outdated way in which the annual German property tax has been assessed. And here, a split runs down through the country dividing the old West from the old East.
Property taxes in the former West German states are based on unit values from 1964, whereas taxes in former East German states are based on unit values from 1935. While the authorities had the option of updating these values every six years, in practice this never actually happened. Most noticeably in Berlin, where east meets west in the most visible way, this means that property taxes are higher in western Berlin than in the former east. It is possible to live on the same street and actually pay a different tax rate than your neighbour.
Back in 2016, when changes to the current valuation system were first proposed, and which we reported on at the time in REFIRE, Germany's national association of real estate agents warned that reforms "could unleash a bureacratic and administrative avalanche", while officials in Germany's 600 tax offices said they would need to double their staff. The revaluing of up to 35 million individual pieces of real estate could take up to 10 years to complete, said sector experts.
Nothing came at the time of these proposals, with the German government deciding it was a federal matter despite intense lobbying at the level of German municipal authorities for change. Local aberrations also led to the proposed reforms being smothered, such as resistance from the Bavarian Christian Social Union (CSU), Merkel's CDU government allies in Berlin, whose capital city Munich has the highest property prices in the country, but only very modest property taxes.
By default, and government neglect, the matter has now ended up in the Federal Constitutional Court in Karlsruhe.
Property tax is one of the most important forms of income for German cities and municipalities, totaling around €14 billion in revenue each year and making up between 10% and 15% of their annual takings. Every resident in Germany pays about €150 a year – property owners can choose to include the tax in rental fees – but the amount you pay varies hugely dependent on where you live, since it’s basically at the discretion of each municipality.
Calculating the tax is complicated and involves three criteria: the (outdated) unit value; a federally-mandated rate based on how the property is used (whether an apartment or a single-family home, for example); and then what is known as a “Hebesatz.” The latter translates literally to “clause for an increase.” It is set by every municipal authority separately and used to make up for the unequal and outdated valuation: On average it adds a whopping 500% to the base value, and tends to be higher in the east and lower in the west.
The fear among municipalities is that the court could rule that the tax as it stands is unconstitutional, and might push for rapid solutions. To prevent this, the municpalities have reverted to their 2016 positions in pressing the government to enact the reforms proposed then. This would involve reassessing land values, rather than each individual building, and would seem to be the simplest and most feasible option to deal with what could otherwise prove to be a hugely complicated task.
A recent survey by the property owners association Haus & Grund based on 500 properties in various German cities concluded that the reforms proposed in 2016 by the Bundesrat (Upper House) would now lead to an average increase in the individual property tax of 30 times current levels, and in some instances of up to 50 times the amount currently payable. This would self-evidently be passed on to tenants in the form of higher rents or to new investors in the form of higher prices. Tenants associations have also been warning about this potential development, as the source of further unacceptable price rises in the cost of living.
The outcome of the German judges' deliberations is being watched carefully by a wide range of market participants. The initial consensus of observers present at the hearings is that the judges do indeed deem the current tax to be unconstitutional, but fear that the time frame involved in legitimising the status quo (of six to ten years) would be too long. They have about three months time to come up with a final judgement.
