The acquisition of real estate in Germany follows a course that is very different from the acquisition of movable property. This article seeks to examine the legal and tax issues that are arising or could arise on real estate transactions.
There are no restrictions regarding the acquisition of real estate by foreigners. However, foreign companies must prove their legal existence and the power of representation of those persons acting for the company.
Generally two steps are necessary in order to purchase real estate in Germany. The first step will be the conclusion of the real estate contract, the second step will be the conveyance of the property, i. e. the transfer of the interest in the real property from the seller to the buyer through the registration of the interest in the land register.
A.) Real estate contract
The preparation of the real estate contract is the most important part of the acquisition process. The real estate contract should contain the following major components:
– the exact description of the character, location, size and usability of the object.
– the exact price (inclusive of all duties, etc.)
– payment terms (payment date etc.)
– priority notice of conveyance (in order to secure the buyer’s title in the real property)
– the conditions of the change of ownership and possible risks of liability
– costs of the land survey (if land survey is necessary)
– development and adjoining property charges
– declaration about any governmental restrictions imposed on the object.
– declaration about any liens/encumbrances
– declaration about required municipal decisions
Pursuant to s 873 (2) German Civil Code (Bürgerliches Gesetzbuch), the parties of the real estate contract are bound by the contract only if the declarations are recorded by a notary, or made before the Land Registry, or submitted to the Land Registry, or if the person entitled has delivered to the other person an approval of registration that satisfies the provisions of the Land Register Act.
Thus, the parties to the real estate contract have to express their will to sell and buy in front of the notary, in this way binding themselves to their own statements.
The notary will then proceed by concluding the contract, which has to be in written form, under penalty of nullity.
B. Conveyance of the real estate by registration in the Land Registry
The transfer of the ownership of the real estate will be accomplished, when the contract of the parties and their will of conveyance is entered in the land registry.
The formalities and requirements for registration in the land registry are the same throughout Germany and there is a land register in every local district.
However, in order to secure the vendee’s land title in the time period between the conclusion of the contract in front of the notary and the entry into the land registry, the vendee has got an expectancy right if the vendee has presented a formal request for registration or if a priority notice has been entered into the land register.
For the registration of the title transfer or the priority notice of conveyance a registration fee must be paid to the local court.
C. Tax
1. Real property transfer tax
When domestic real estate is sold or changes owner, a one-time real property transfer tax (land transfer tax) of 3.5 percent of the purchase price is levied if the purchase price or consideration exceeds EUR 2,500. Real property transfer tax is usually paid by the buyer. In Hamburg and Berlin, the rate is 4.5%.
2. Real estate tax
German property is subject to a real estate tax, levied annually. The tax base is the ‘assessed value’ and the tax depends on several factors like location, size, use and the local municipal coefficient, etc.
3. Value Added Tax (VAT)
Real property transactions are generally not subject to the German VAT. However, an entrepreneurial seller is entitled to treat the transaction as taxable.