DIRECT MARKET REPORT GERMAN RETAIL - Europe Real Estate

Corporate tax rate to 15.8%
In the summer of 2007 the German Government passed the bill of the business
tax reform 2008. With the commencement of this reform -effective from 1
January 2008- the tax rate (corporation tax + solidarity surcharge) will fall from
26.375% to 15.825% i.e. -10.55%. The trade tax shall be reduced as well. The
final reduction depends on the municipality where the corporation is established or
where the business is located. However, most real estate buy & hold companies
don’t have to pay any trade tax.
Interest cost deduction barrier
The difference to the current thin capitalization rules is that the limitation is not
only applicable to interest paid for shareholder loans but for all other loans
including bank loans. The legislation means that the interest rate barrier will come
into effect if the free quota on the financing balance exceeds EUR 1m. The
consequence will be that merely financing costs of 30% of earnings before
interest, taxes, depreciation and amortization can be tax-deducted. Interest cost
deduction barrier is aimed at corporate groups i.e. an operation forms part of a
group if it is (or could be) consolidated with one or several other companies.
Withholding Tax
The taxation of private investors’ capital income will change per 1 January 2009.
Private investors are no longer subject to their progressive individual income tax
rate (up to 45%) but instead subject to a flat tax of 25%. This flat tax applies to
investment income like dividends, interests and other income from financial
products and for capital gains. The taxation of interests with a flat tax of 25% is
an improvement. A disadvantage that has to be pointed out is that capital gains
from moveable assets (especially financial products) are taxed independently of
the period of ownership. The current situation (until the end of 2008) is that the
capital gain of moveable properties is not taxed if the owner sells the properties
after a period of more than one year. Domestic banks holding affected securities
in custody are obliged to deduct the tax and to transfer it to the tax authorities.
Dividends distributed from the capital contribution account in accordance with
section 27 of the German Corporation Tax Act are not subject to definitive
withholding tax.
Trade tax
Another component of the 2008 corporate tax reform concerns the allocation of
retailers’ rental payments on the trade tax; effectively almost 19% of rental
payments will be taken liable for trade tax in order to avoid tax savings by owneroccupiers
(e.g. Aldi, Bauhaus) Exemplary calculations show that a higher tax
burden will have to be taken by (international) chains, which pay relatively high
levels of rent and recognize low profits in their balance sheets.
German retail update - 28/11/2007 19