Extension of income subject to corporation tax for German and foreign investment funds

As of March 27, 2024 (Federal Law Gazette 2024 I No. 108) a new law expanded the list of so called “other domestic income” subject to corporation tax in Germany.

What Changes?

Investment funds must subject capital gains from German, but also foreign corporations whose share value is predominantly based on German immovable assets - so-called German real estate corporations or German property-rich companies - to corporation tax if the following conditions are met:

• the fund has directly or indirectly held at least 1 % of the capital of the corporation within the last five years
• at some point during the 365 days prior to the sale, more than 50 % of the share value of the corporation was directly or indirectly based on domestic immovable assets and
• at this time, the Fund was the beneficial owner of the shares in this corporation

The active assets of the business assets are to be used at book value to determine the real estate quota. The regulation applies to disposals after March 27, 2024. Only increases in value that occurred after March 27, 2024 are taxable.

Obligation to submit a Tax return

As the gains in question are not subject to capital gains tax deduction, all German and foreign investment funds are generally obliged to file corporate income tax returns in Germany. Regarding such disposals made after March 27, 2024 in the taxable period calendar year 2024 the tax return is due without tax advisor until end of July 2025 and with tax advisor until end of February 2026.

Accordingly, the capital gains of corporations whose original business activity is aimed at generating income from letting and leasing and / or the sale of real estate would remain relevant. According to the draft, the statement of assets in the most recently audited and publicly accessible annual financial statements could be used as a basis for determining the real estate ratio.

We will keep an eye on the developments and our colleagues in Germany can offer you our support in identifying the relevant disposals and classes, determining the gains and filing the corporation tax returns.