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Electricity from renewable energies and provision of ancillary services for real estate leasing within limits not detrimental to trade tax exemption

  • Germany
  • Tax planning and consultancy

26-04-2021

Planned new provision regarding the extended tax tax ex-emption according sec. 9 No. 1 German Trade Tax Act (GewStG) as of 2021

Trade tax exemption of income from the leasing of real estate …

While real estate corporations are generally liable to trade tax, this only applies to real estate partnerships if they either are qualified "deemed commercial" partnerships or are (originally) engaged in commercial activities. A partnership is considered "deemed commercial" if it does not engage in any (original) commercial activity (such as real estate trading), but only grants management authority to personally liable partners (general partners) or persons who are not shareholders. Accordingly, a German partnertship in form of a GmbH & Co. KG with a general partner being a GmbH without an interest in the partnership and a 100% limited partner without management authority is in principle liable to trade tax, but may benefit from certain trade tax exemptions: Under current law, rental or leasing income from own real estate can be exempted from trade tax by means of the so-called "extended trade tax reduction" if only own real estate or own investment assets are managed in addition to own real estate.

… at risk through letting of operating equipment and ancillary services

However, the requirements for the tax benefit of the extended trade tax reduction are high: In particular, the co-letting of movable property / fixtures (so-called "operating equipment", Betriebsvorrichtungen) or the provision of ancillary services may result in an "infection" of the rental and leasing income from real estate asset management, so that all income will become subject to trade tax. No de minimis thresholds apply, nor does it matter whether the services or ancillary activities are necessary for the rental/lease activity. Both the identification of operating equipment and its qualification for tax purposes usually pose a practical challenge, because the catalogue used by the tax authorities does not include all types of operating equipment for various types of real estate use, such as the provision of charging stations for e-cars and e-bikes, thegeneration of electricity (especially via photovoltaic systems) or the provision of apps by the tenant as part of the use of the building.

Ancillary services permissible from 2021 onwards

As of 2021 already, the following relief from the extended reduction shall apply to real estate companies according to the new version of Section 9 of the Trade Tax Act under the draft Fund Location Act (Fondsstandortgesetz):

| The generation of electricity from renewable energy sources and the operation of charging stations for electric vehicles and electric bicycles is permissible within the scope of the extended reduction if it can be proven that this income does not exceed 10 % of the income from renting/leasing own real estate. The electricity from the energy generation systems may only be fed into the grid or supplied to own tenants or used for self-consumption. As before, commercial income from the operation of a combined heat and power plant (Blockheizkraftwerk) is not eligible.

| In addition to the aforementioned electricity leases, income from other ancillary services rendered on the basis of a contractual agreement concluded directly with the tenant shall also be harmless for the purposes of granting the extended trade tax reduction for rental income if these do not exceed 5 % of the income from the letting/leasing of the real property.

However, the permitted income from the aforementioned commercial services within the scope of the de minimis limits will themselves generally be subject to trade tax.

The Bundestag approved the draft law on 22 April 2021. In order to come into force, the law requires the approval of the Federal Council, which is expected in May/June 2021.

Practical advice

Real estate owners have been contributing to the development of energy from renewable sources for some time, e.g. by installing photovoltaic systems on property roofs. In this respect, the new regulation takes this into account by creating a legally secure tax framework. The introduction of the de minimis limit of 5% for permissible commercial activities also accommodates the practical requirements of (commercial) letting and brings it into line with the limit of permissible commercial activities from so-called "active entrepreneurial management" already applicable to real estate investment funds.

It is yet to be observed how the newly introduced isolated approach for commercial real estate companies and the introduction of a de minimis limit of 5% or 10% will affect the tax treatment of asset-managing real estate partnerships: In the sense of increasing legal certainty and simplifying taxation, it would be welcomed if, conversely, the ancillary commercial services that are harmless for an asset-managing partnership were raised from 3 % of the total net turnover to 5 % or 10 %, albeit capped at the applicable trade tax allowance of currently EUR 24,500.