Focus in this edition: Real Estate and Tax Law
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1. New Obstacles: Decorative Repairs Transferred to the Tenant
Recent decisions of the Bundesgerichtshof / German Federal Court provide for new obstacles with regard to clauses transferring the responsibility for decorative repairs to the tenant. For instance, such a clause may only be valid if the apartment had been let in a renovated condition at the commencement of lease (Bundesgerichtshof / German Federal Court, March 18, 2015 – VIII ZR 185/14; VIII ZR 21/13). Also, clauses providing for a partial payment of renovating costs may be invalid in the event that the renovation deadline has not expired when the tenant returned the apartment (Bundesgerichtshof / German Federal Court, March 18, 2015 – VIII ZR 242/13). According to the Court such clauses are not transparent. The cases concerned residential leases but it is very likely that they may also be applied to commercial leases.
2. Commercial Lease: Principle of Cost Efficient Management
A commercial tenant may question administrative expenses for being too high if they violate the principle of cost efficient management. In order to do so, the tenant must substantiate his allegation by demonstrating that the same administrative services are locally available for a much lower price (Bundesgerichtshof / German Federal Court, December 17, 2014 – XII ZR 170/13). On the other hand the landlord is not required to give details on the services included in a flat rate for administrative services.
3. Subleasing to Tourist Justifies Termination for Cause of Residential Lease
Subleasing an apartment to tourists (e.g. through Airbnb) without informing the landlord may justify a termination for cause of the lease – even without any prior warning letter (Landgericht Berlin / Regional Court of Berlin, July 23, 2012 – 12 O 506/11; March 2nd, 2015 – 67 T 29/15). Previously, the Bundesgerichtshof / German Federal Court had ruled in another case that the general permission of the landlord for subleasing may not cover hosting paying tourists (Bundesgerichtshof / German Federal Court, January 8, 2014 – VIII ZR 210/13).
4. Capital Gains Tax: Sale of Real Estate within 10 Year Holding Period
Whether the sale of real estate is exercised within the 10 year holding period for the purposes of capital gains tax will be determined on the basis of the date of the notarization of the deed of sale. The fact of a later completion of a condition precedent to closing would be irrelevant for tax purposes according to the Bundesfinanzhof / Federal Fiscal Court, February 10, 2015 – IX R 23/13. In the case at hand, the parties had already notarized the deed for the sale of a property formerly used by the railway. However, the administration’s permission to change the general function of the property as railway property had been a condition precedent to closing. The permission was given after the term of the 10 year holding period whereas the notarization had taken place before the end of the term of that period. The court ruled that the parties were already sufficiently bound by the notarization. Therefore, the vendor of the property had to declare the profit of the deal as taxable income.
5. Recognition of Disproportional Profit Distributions for Tax Purposes
Also a disproportional profit distribution must be recognized for tax purposes as long as it is in line with corporate law. This applies also in the event that the benefitting shareholder of a GmbH (Gesellschaft mit beschränkter Haftung / German Limited Liability Company) intended to offset income against losses and reinvested the distribution in the company. The Bundesfinanzhof / Federal Fiscal Court, December 4, 2014 – IV R 28/11, did not miss reminding the Tax Administration that the principle had already been confirmed in many precedents before. It objected to the Tax Administration’s new regulation recognizing such profit distributions only in the event of reasonable economic purposes. A change of the regulation is still outstanding.
6. “Exit-Bonus“ of Managing Directors after Management-Buy-Out
An “Exit-Bonus” paid to a Managing Director by one of the selling co-shareholders of a GmbH (Gesellschaft mit beschränkter Haftung / German Limited Liability Company) is taxable as a whole. It cannot be treated as partly tax free capital gains even in the event that the Managing Director had owned more than 1% of the shares (Finanzgericht Münster / Fiscal Court of Münster, December 12, 2014 – 4 K 1918/13 E). The Court pointed out that EUR 426.560,00 could not be treated as capital gains due to the sale of shares because they were not paid by the buyer of the shares sold. Therefore, they had to be considered as remuneration for the employment of the Managing Director.