Withholding tax

Withholding Tax - Withholding tax is a form of taxation in which the tax is withheld directly at the source of the income and remitted to the tax authority-not by the taxpayer themselves, but by the payer. In the real estate sector, withholding tax applies to income from real estate holdings abroad, payments to foreign service providers, and capital gains tax on distributions from real estate funds.

Withholding Tax on Foreign Real Estate Holdings

If an owner residing in Germany owns a property abroad, the country where the property is located often levies a withholding tax on rental income and capital gains. The rate varies widely: In Spain, 19% is withheld on rental income; in Austria, 20%; and in France, up to 33%. To avoid double taxation, double taxation treaties (DTTs) regulate the crediting of foreign withholding tax against the German tax liability. The owner must report the foreign income on their German tax return and can have the withholding tax paid credited or exempted.

It is important to distinguish between the credit method and the exemption method: Under the exemption method, foreign income is not taxed in Germany but increases the tax rate on German income (progression clause). Under the credit method, the withholding tax paid abroad is directly credited against German income tax, up to a maximum of the amount of German tax on this income. Which method applies depends on the respective DTA-and can result in significant differences in the actual tax burden.

Capital Gains Tax on Real Estate Funds

Distributions from open-end and closed-end real estate funds are subject to capital gains tax in Germany (25% plus the solidarity surcharge and, if applicable, capital gains tax), which is withheld directly by the custodian bank as withholding tax. Since the 2018 investment tax reform, partial exemptions have been granted for real estate funds: 60% of income for funds with predominantly domestic real estate, 80% for foreign real estate. This significantly reduces the effective tax burden. Capital gains tax is creditable against personal income tax.

Cross-border withholding tax issues can arise, particularly with Real Estate Investment Trusts (REITs) and foreign real estate funds. Under certain circumstances, foreign withholding tax at the fund level may not be fully creditable against German tax, resulting in a genuine additional burden. Anyone investing in such products should carefully review the fund’s tax structure and consult a tax advisor.

Withholding Tax and Real Estate Transfer Tax Abroad

When purchasing foreign real estate, the foreign acquisition is often subject to tax obligations structured as withholding tax-like levies. In Spain, for example, purchases by foreigners in some regions are subject to an increased real estate transfer tax or stamp duty; in France, there are similar transfer taxes. While these are not withholding taxes in the strict sense, they reduce the net benefit from the investment in the same way. Upon sale, capital gains taxes may also apply in the source country, which must be paid independently of German income tax.

In addition to the ongoing taxes on rental income, local property taxes (e.g., the Spanish IBI, the French Taxe foncière, or the Austrian Grundsteuer) must often be taken into account for foreign real estate. These taxes are generally not creditable against the German tax liability but, as income-related expenses, reduce the taxable foreign rental income.

Practical Tip for Property Owners in Nuremberg

We recommend that property owners in the Nuremberg metropolitan area who own real estate abroad or have invested in real estate funds have their tax return prepared by a tax advisor with international experience. Claiming foreign withholding taxes requires proper documentation and knowledge of the relevant DTA provisions. Common mistake: Withholding tax paid abroad is not credited to German taxes, or is credited incorrectly-which costs you money. For real estate fund distributions, you should verify that the partial exemption is applied correctly and carefully retain the tax certificate from your custodian bank.

In Nuremberg, there are a number of tax advisors and certified public accountants specializing in international tax law. We recommend involving them at the latest when you wish to purchase or sell a foreign property-ideally as early as the planning phase, so that you can factor the tax implications into your investment decision.

Frequently Asked Questions

Is foreign withholding tax automatically credited in Germany?

No. The credit must be claimed in the German tax return (Annex AUS). You must provide proof of the withholding tax paid abroad in the form of a tax assessment notice or a certificate from the foreign tax authority. The maximum amount credited is the amount corresponding to the German tax on this income. If the foreign withholding tax exceeds the German tax rate, the difference is forfeited-unless the DTA provides for a refund in the source country.

What happens if there is no double taxation agreement?

Without a DTA, there is a risk of actual double taxation: The country of source taxes the income via withholding tax, and Germany taxes it again as worldwide income. In this case, the taxpayer may, pursuant to Section 34c of the German Income Tax Act (EStG), credit the foreign tax against the German tax or deduct it as income-related expenses. The credit is generally more advantageous. Germany has concluded DTAs with over 90 countries-gaps exist primarily for less common real estate locations.

As a landlord in Germany, do I have to withhold withholding tax?

Generally no-no withholding tax is withheld on rent payments to domestic landlords. An exception applies under Section 50a of the German Income Tax Act (EStG) for payments to foreign landlords (limited taxpayers): In certain cases, the tenant or property management company must withhold tax. This primarily applies to commercial rents paid to foreign landlords. For residential rents paid to foreign private landlords, there is generally no obligation to withhold tax-however, the landlord must file a tax return in Germany.

How does the progression clause affect my tax burden?

If foreign income is exempt from tax in Germany under the exemption method, it still increases the tax rate on the remaining domestic income. This means: While the exempt foreign income is not subject to tax, the income taxable in Germany is taxed at a higher rate than it would be without the foreign income. For low levels of foreign income, this effect is marginal; for high rental income from abroad, it can significantly increase the tax burden.

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